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Accurate Pricing of Swaptions via Lower Bound

In: Handbook of Recent Advances in Commodity and Financial Modeling

Author

Listed:
  • Anna Maria Gambaro

    (Università Milano Bicocca)

  • Ruggero Caldana

    (Accenture)

  • Gianluca Fusai

    (City University London
    Università del Piemonte Orientale “A. Avogadro”)

Abstract

We propose a new lower bound for pricing European-style swaptions for a wide class of interest rate models. This method is applicable whenever the joint characteristic function of the state variables is either known in closed form or can be obtained numerically via some efficient procedure. Our lower bound involves the computation of a one dimensional Fourier transform independently of the underlying swap length. Finally the bound can be used as a control variate to reduce the confidence interval in the Monte Carlo simulation. We test our bound on different affine models, also allowing for jumps. The lower bound is found to be accurate and computationally efficient.

Suggested Citation

  • Anna Maria Gambaro & Ruggero Caldana & Gianluca Fusai, 2018. "Accurate Pricing of Swaptions via Lower Bound," International Series in Operations Research & Management Science, in: Giorgio Consigli & Silvana Stefani & Giovanni Zambruno (ed.), Handbook of Recent Advances in Commodity and Financial Modeling, chapter 0, pages 183-208, Springer.
    • Handle: RePEc:spr:isochp:978-3-319-61320-8_9
    DOI: 10.1007/978-3-319-61320-8_9
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