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The Efficient Computation Of Prices And Greeks For Callable Range Accruals Using The Displaced-Diffusion Lmm

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Listed:
  • CHRISTOPHER BEVERIDGE

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

  • MARK JOSHI

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

Abstract

We study the simulation of range accrual coupons when valuing callable range accruals in the displaced-diffusion LIBOR market model (DDLMM). We introduce a number of new improvements that lead to significant efficiency improvements, and explain how to apply the adjoint-improved pathwise method to calculate deltas and vegas under the new improvements, which was not previously possible for callable range accruals. One new improvement is based on using a Brownian-bridge-type approach for simulating the range accrual coupons. We consider a variety of examples, including when the reference rate is a LIBOR rate, when it is a spread between swap rates, and when the multiplier for the range accrual coupon is stochastic.

Suggested Citation

  • Christopher Beveridge & Mark Joshi, 2014. "The Efficient Computation Of Prices And Greeks For Callable Range Accruals Using The Displaced-Diffusion Lmm," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 17(01), pages 1-47.
    • Handle: RePEc:wsi:ijtafx:v:17:y:2014:i:01:n:s0219024914500010
    DOI: 10.1142/S0219024914500010
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    References listed on IDEAS

    as
    1. Erik Schlögl, 2001. "Arbitrage-Free Interpolation in Models of Market Observable Interest Rates," Research Paper Series 71, Quantitative Finance Research Centre, University of Technology, Sydney.
    2. Beveridge, Christopher & Joshi, Mark & Tang, Robert, 2013. "Practical policy iteration: Generic methods for obtaining rapid and tight bounds for Bermudan exotic derivatives using Monte Carlo simulation," Journal of Economic Dynamics and Control, Elsevier, vol. 37(7), pages 1342-1361.
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