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Fast And Accurate Pricing And Hedging Of Long-Dated Cms Spread Options

Author

Listed:
  • MARK JOSHI

    (Centre for Actuarial Studies, Department of Economics, University of Melbourne, Victoria 3010, Australia)

  • CHAO YANG

    (Centre for Actuarial Studies, Department of Economics, University of Melbourne, Victoria 3010, Australia)

Abstract

We present a fast method to price and hedge CMS spread options in the displaced-diffusion co-initial swap market model. Numerical tests demonstrate that we are able to obtain sufficiently accurate prices and Greeks with computational times measured in milliseconds. Further, we find that CMS spread options are weakly dependent on the at-the-money Black implied volatility skews.

Suggested Citation

  • Mark Joshi & Chao Yang, 2010. "Fast And Accurate Pricing And Hedging Of Long-Dated Cms Spread Options," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 13(06), pages 839-865.
    • Handle: RePEc:wsi:ijtafx:v:13:y:2010:i:06:n:s0219024910006029
    DOI: 10.1142/S0219024910006029
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    References listed on IDEAS

    as
    1. T. R. Hurd & Zhuowei Zhou, 2009. "A Fourier transform method for spread option pricing," Papers 0902.3643, arXiv.org.
    2. Joshi, Mark & Yang, Chao, 2011. "Efficient greek estimation in generic swap-rate market models," Algorithmic Finance, IOS Press, vol. 1(1), pages 17-33.
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    Cited by:

    1. Joshi, Mark & Yang, Chao, 2011. "Fast delta computations in the swap-rate market model," Journal of Economic Dynamics and Control, Elsevier, vol. 35(5), pages 764-775, May.
    2. Cristian Homescu, 2011. "Adjoints and Automatic (Algorithmic) Differentiation in Computational Finance," Papers 1107.1831, arXiv.org.

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