Valuation of certain CMS spreads
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(Published version)
Date
2017
Authors
Wu, P.
Elliott, R.J.
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Journal article
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Financial Markets and Portfolio Management, 2017; 31(4):445-467
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Abstract
In this paper, we derive an approximate lognormal process for the swap rate under the multifactor LIBOR market model using a Levy approach. Using the approximate dynamics for the swap rate, the constant maturity swap spread digital range notes with different strike rates are valued in analytic and semi-analytic form. The CMS spread digital range notes are widely traded in the marketplace, or embedded in structure notes.
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Copyright 2017 Swiss Society for Financial Market Research
Access Condition Notes: Accepted manuscript available after 1 January 2019