CASH-SETTLED SWAPTIONS: A NEW PRICING MODEL.

Autor: PIETERSZ, RAOUL, SENGERS, FRANK, MICHIELON, MATTEO
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Zdroj: International Journal of Theoretical & Applied Finance; Jun2020, Vol. 23 Issue 4, pN.PAG-N.PAG, 16p
Abstrakt: The market for cash-settled swaptions has changed its quotation conventions. Cash-settled zero-wide collars struck at the swap-settled forward have started trading at nonzero prices. Apart from full-fledged term-structure models, a simple arbitrage-free model to consistently value both cash-settled and swap-settled swaptions has been lacking so far. We propose a straightforward arbitrage-free model that consistently values cash-settled and swap-settled swaptions, and that also allows one to match zero-wide collar premiums. The defining characteristic of the model is to explicitly specify the swap-settled annuity as a function of a discount swap rate under the swap-settled annuity measure. The new methodology has many desirable features, and we show via a numerical example how the model performs in realistic market scenarios. [ABSTRACT FROM AUTHOR]
Databáze: Complementary Index