Interest rate derivatives have become some of the most important derivative instruments, making up a higher proportion of financial market deals. Although financial markets are dominated by stock and stock indices in terms of activity, the bond market, and consequently the interest rate...

We present a flexible approach for the valuation of interest rate derivatives based on Affine Processes. We extend the methodology proposed in Keller-Ressel et al. (2009) by changing the choice of the state space. We provide semi-closed-form solutions for the pricing of caps and floors. We then...

Computational parsimony makes reduced factor LIBOR market models popular among practitioners. However, value functions and sensitivities of such models are described by degenerate parabolic (i.e. semi-elliptic) equations where the existence of regular global solutions is not trivial. In this...

This paper deals with issues related to the choice of the interest rate model to price interest rate derivatives. After the development of the market models, choosing the interest rate model is become almost a trivial task. However their use not always is possible, so that the problem of...

We propose a general framework for efficient pricing via a Partial Differential Equation (PDE) approach of cross-currency interest rate derivatives under the Hull-White model. In particular, we focus on pricing long-dated foreign exchange (FX) interest rate hybrids, namely Power Reverse Dual...

SABR stochastic volatility model is appealing for modeling smile and skew of option prices. Hagan, who first proposed this model, derived a closed form approximation for european options and showed that it provides consistent and stable hedges. Here I prove a new exact closed formula for the...

The most important result in this working paper is the construction of a multidimensional Gaussian interest-rate term structure model, where, based on a construction of equivalent martingale measures and a suitable selection of numerators, it is shown that it is possible to derive analytical...

We collect some results in Piterbarg, Interest Rate Modelling, needed for the implementation of a GSR model. We develop explicit formulas for piecewise constant volatility and reversion parameters under the forward measure

Usually a Libor Market model with a stochastic basis as speci ed for instance by Mercurio, F. (2009) lacks of a suitable calibration since there are not enough market quotes available. To this end we suggest to take a low parametric model which essentially is calibrated to the current OIS curve....