Valuation of certain CMS spreads |
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| Authors: | Ping Wu Robert J Elliott |
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| Institution: | 1.Jiangsu Key Laboratory of Financial Engineering,Nanjing Audit University,Nanjing,China;2.School of Mathematics and Statistics,Nanjing?University of Information Science and Technology,Nanjing,China;3.Haskayne School of Business,University of Calgary,Alberta,Canada;4.School of Commerce,University of South Australia,Adelaide,Australia |
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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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