Currency-protected swaps and swaptions with nonzero spreads in a multicurrency LMM

Jui Jane Chang, Son Nan Chen, Ting Pin Wu

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

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.

Original languageEnglish
Pages (from-to)827-867
Number of pages41
JournalJournal of Futures Markets
Volume33
Issue number9
DOIs
StatePublished - Sep 2013

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