Pricing of interest rate derivatives, such as CMS spread or mid-curve options, depends on modelling the underlying single rates. For flexibility and realism, these rates are often described in the framework of stochastic volatility models. In this paper, we allow rates to be modelled within a...

"The Heston and the SABR model are reviewed and analyzed in detail. Both models are widely applied in practice. Such models are necessary to account for the volatility skew/smile and form the fundament for pricing and risk management of complex interest rate structures such as Constant Maturity...

This book on Interest Rate Derivatives has three parts. The first part is on financial products and extends the range of products considered in Interest Rate Derivatives Explained I. In particular we consider callable products such as Bermudan swaptions or exotic derivatives. The second part is...

We provide an efficient swaption volatility approximation for longer maturities and tenors, under the lognormal forward-LIBOR model. In particular, we approximate the swaption volatility with a mean update of the spanning forward rates. Since the joint distribution of the forward rates is not...