Currency‐Protected Swaps and Swaptions with Nonzero Spreads in a Multicurrency LMM |
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| Authors: | Jui‐Jane Chang Son‐Nan Chen Ting‐Pin Wu |
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| Affiliation: | 1. Jui‐Jane Chang is an assistant professor at the Department of Financial Engineering and Actuarial Mathematics, Soochow University, , Taiwan;2. Son‐Nan Chen is a professor at the Shanghai Advanced Institute of Finance (SAIF), Shanghai Jiao Tong University, , China;3. Ting‐Pin Wu is an associate professor at the Department of Finance, National Central University, , Taiwan |
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| Abstract: | Despite the fact that currency‐protected swaps and swaptions are widely traded in the marketplace, pricing models for zero‐spread swaps, and swaptions have rarely been examined in the extant literature. This study presents a multicurrency LIBOR market model and uses it to derive pricing formulas for currency‐protected swaps and swaptions with nonzero spreads. The resulting pricing formulas are shown to be feasible and tractable for practical implementation and their hedging strategies are also provided. Our pricing formulas provide prices close to those computed from Monte Carlo simulation, but involve far less computation time, and thereby offering almost instant price quotes to clients and daily marking‐to‐market trading books, and facilitating efficient risk management of trading positions. |
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