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Within the framework of the LIBOR market model, this article presents a new approach for finding the approximate distribution of constant maturity swap (CMS) rates under forward martingale measures. With [...]

Barrier caps, floors, and swaptions are priced in a closed form via the time-changed technique under the market models. The parameters of the resulting formulas can be easily extracted from [...]

Within the multifactor LIBOR market model, the authors examine three types pf interest rate spread options: LIBOR vs. LIBOR, LIBOR vs. swap rate, and swap rate vs. swap rate. These [...]

Under the arbitrage-free framework of the HJM model (Heath, Jarrow and Morton [1992]), this article simultaneously extends the BGM model (Brace, Gatarek and Musiela [1997])from a single-currency economy to a [...]

Borovkova, Permana, and Weide [2007, BPW] proposed an accurate and versatile method to price general basket options (including spread options). In implementing the BPW model, a nonlinear system of three equations with three unknowns must be solved to estimate parameters. If we directly compute the system of equations via a computer, it takes about 2.3 seconds, which is not significantly shorter than the computing time (about 5.7 seconds) based on Monte Carlo simulation for pricing basket options. To relieve this somewhat time-consuming problem, this note provides an analytical method to solve this equation system. With our method, it takes almost no time, about 0.015 seconds, to price a basket option. Therefore, our parameter estimation method enhances the efficiency and tractability of the BPW model for end-users in the marketplace. [ABSTRACT FROM AUTHOR]

The main purpose of this article is to provide an approximate general pricing formula for CMS spread options that can handle the case of nonzero strike rates. A generalized lognormal distribution is used to approximate the distribution of the difference between two CMS rates. Pricing models for CMS spread options with nonzero strike rates are then derived under the multifactor LIBOR market model and also shown to be analytically tractable for practical implementation. The models are shown to be robustly accurate in comparison with Monte Carlo simulation. [ABSTRACT FROM AUTHOR]