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Valuation of CMS range notes in a multifactor LIBOR market model

Author

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  • Ping Wu

    (School of Mathematics and Statistics, Nanjing University of Information Science & Technology, No. 219 Nanjing, Jiangsu, China)

  • Robert J. Elliott

    (Haskayne School of Business, University of Calgary, 2500 University Dr NW, Calgary, Canada3School of Mathematics, University of Adelaide, Adelaide SA 5000, Australia4Centre for Applied Financial Studies, University of South Australia, Adelaide SA 5001, Australia)

Abstract

In the framework of a multifactor LIBOR market model (LMM), this paper presents a new approach for finding an approximate distribution of constant maturity swap (CMS) rates under the terminal martingale measure. With this approach, we derive an analytical pricing formula for CMS range notes, which is both intuitive and tractable. Many exotic CMS rate derivatives are widely traded in the marketplace or embedded in structure notes.

Suggested Citation

  • Ping Wu & Robert J. Elliott, 2016. "Valuation of CMS range notes in a multifactor LIBOR market model," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 3(01), pages 1-19, March.
    • Handle: RePEc:wsi:ijfexx:v:03:y:2016:i:01:n:s2424786316500018
    DOI: 10.1142/S2424786316500018
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    References listed on IDEAS

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    1. Farshid Jamshidian, 1997. "LIBOR and swap market models and measures (*)," Finance and Stochastics, Springer, vol. 1(4), pages 293-330.
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    3. Ting‐Pin Wu & Son‐Nan Chen, 2008. "Valuation of floating range notes in a LIBOR market model," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 28(7), pages 697-710, July.
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    6. João Pedro Vidal Nunes, 2004. "MultiFactor Valuation of Floating Range Notes," Mathematical Finance, Wiley Blackwell, vol. 14(1), pages 79-97, January.
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    Cited by:

    1. Ping Wu & Robert J. Elliott, 2017. "Valuation of certain CMS spreads," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 31(4), pages 445-467, November.

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