When pricing the convexity effect in irregular interest rate derivatives such as, e.g., Libor-in-arrears or CMS, one often ignores the volatility smile, which is quite pronounced in the interest rate options market. This note solves the problem of convexity by replicating the irregular interest...

When pricing the convexity effect in irregular interest rate derivatives such as, e.g., Libor-in-arrears or CMS, one often ignores the volatility smile, which is quite pronounced in the interest rate options market. This note solves the problem of convexity by replicating the irregular interest...

Evaluating interest rate derivatives stands and falls by a model properly capturing the volatility smile/skew. This does not only apply to pricing but also to evaluating counterparty default charges. We propose an arbitrage free model where forward Libor rates from the standard Libor Market...

We present a simple and numerically efficient approach to the calibration of the Heston stochastic volatility model with piecewise constant parameters. Extending the original ansatz for the characteristic function, proposed in the seminal paper by Heston, to the case of piecewise constant...

In Monte Carlo simulation, Latin hypercube sampling (LHS) [McKay et al. (1979)] is a well-known variance reduction technique for vectors of independent random variables. The method presented here, Latin hypercube sampling with dependence (LHSD), extends LHS to vectors of dependent random...

This paper introduces a structural credit default model that is based on a hyper-exponential jump diffusion process for the value of the firm. For credit default swap prices and other quantities of interest, explicit expressions for the corresponding Laplace transforms are derived. As an...