The Co‐initial Swap Market Model

In this paper, we introduce a novel approach to the pricing and the risk management of generic European style interest‐rate derivatives. This new model has great flexibility and has the advantage of avoiding complex model calibration techniques typical of standard short‐rate models. Dynamics is assigned on a set of co‐initial forward swap rates, and arbitrage‐free restrictions are determined in a normal and lognormal setup. Model implementation and calibration are discussed, and details of two example applications are also presented.
(J.E.L.: G12, G13).