We consider a stochastic local volatility model with domestic and foreign stochastic interest rates and identify a bias with respect to the deterministic local volatility with deterministic rates. Relating the local volatility of our model to that of the forward price, we quantify that bias by...

In the second part of a series of articles on the pricing of interest rate contingent claims in the multifactor Quadratic Gaussian model, we concentrate on the pricing of swaptions. Assuming the zero-coupon bond volatility to be a deterministic function of some Markov processes, we derive the...