(), where Jamshidian decomposition is used for pricing credit default swap options under a CIR++ (extended Cox-Ingersoll-Ross) stochastic intensity model . Jamshidian Decomposition for Pricing Energy Commodity European Swaptions. Article (PDF Available) · January with Reads. Export this citation. Following Brigo 1 p, we can decompose the price of a swaption as a sum of Zero-Coupon bond options (Jamshidian’s Trick). To do so, the.

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Read the Docs v: A reciever swaption can be seen as a call option on a coupon-paying bond with fixed payments equal to at the same payment dates as the swap. These are fairly liquid contracts so present a good choice for our calibration.

Our next choice is which vanilla rates options we want to use for the calibration. What if we want to control the volatility parameter to match vanilla rates derivatives as well? When several are visible, the challenge becomes to choose a piecewise continuous function to match several of them.

Pricing engines usually have one or more term structures tied to them for pricing. For simplicity, for the rest of this post we will assume all payments are annual, so year fractions are ignored. Calculating these for time-varying parameters is algebra-intensive and I leave it for a later post, but for constant parameters the calculation is described in Brigo and Mercurio pg and gives a price of. The engine assumes that the exercise date equals the start date of the passed swap.

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Calibrating time-dependent volatility to swaption prices

Cash settled swaptions are not supported. Concerning the start delay cf. Callable fixed rate bond Black engine. Looking at this expression, we see that each term is simply the present value of an option to buy a ZCB at time that expires at one of the payment dates with decompositoin. This will generate the necessary lattice for pricing. Leave a Reply Cancel reply Your email address will not be published.


So the price of a swaption has been expressed entirely as the price of a portfolio of options on ZCBs!

Jamshidian’s trick

To see this, consider the price jamshidoan a swap discussed before:. One factor gaussian model swaption engine. We can see how we could use the above to calibrate the volatility parameter to match a single market-observed swaption price. With this construction, the necessary tree will not be generated until calculation. All float coupons with start date greater or equal to the respective option expiry are considered to be part of the exercise into right. Since rates are gaussian in HWeV this can be done analytically.

Many alternatives jamshidiann discussed in the literature to deal with this concern, but the general procedure is the same. This will construct the volatility term structure.

For the HWeV model, these are deterministic and depend only on the initial rate, and calibrated time dependent parameters in the model. Decompositin these contracts have an exercise date when the swap starts and the swaps themselves will have another termination date which define a 2-dimensinal spaceit will not be possible to fit all market-observable swaptions with a one factor model.

Uses the term structure from the hull white model by default. In HWeV this can be done analytically, but for more general models some sort of optimisation would be required. This will generate the necessary lattice from the time grid. Practically, we should choose the most liquid swaptions and bootstrap to these, and only a few 5Y, 10Y etc will practically be tradable in any case.


Every asset is associated with a pricing enginejamxhidian is used to calculate NPV and other asset data. A common choice is the interest rate swaption, which is the right to enter a swap at some future time with fixed payment dates and a strike. All fixed coupons with start date greater or equal to the respective option expiry are considered to be part of the exercise into right.

Swaption priced by means of the Black formula, using a G2 model.

Calibrating time-dependent volatility to swaption prices – Quantopia

Constructor for the TreeSwaptionEngine, using a number of time steps. Shifted Lognormal Black-formula swaption engine. Pricing engines are the main pricing dexomposition in QuantLib. For redemption flows an associated start date is considered in the criterion, which is the start date of the regular xcoupon period with same payment date as the deccomposition flow. We have seen in a previous post how to fit initial discount curves to swap rates in a model-independent way.

So, the price of a swaption is an option on receiving a portfolio of coupon payments, each of which can be thought of as a zero-coupon bond paid at that time, and the value of the swaption is the positive part of the expected value of these:.