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Swap Rate a la Stock: Bermudan Swaptions Made Easy

Speaker: Dariusz Gątarek

CQF Institute is proud to bring you a free online talk with Dariusz Gątarek on Swap Rate a la Stock: Bermudan Swaptions Made Easy

This event can earn you up to 2 CPD credits.

Abstract

This talk will show how Markovian projection together with some clever parameter freezing can be used to reduce a full-edged local volatility interest rate model - such as Cheyette (1992) - to a ”minimal" form in which the swap rate evolves essentially like a dividend-paying stock. Using a number of numerical examples, this talk will compare such a minimal “poor man's" model to a full-edged Cheyette local volatility model and the market benchmark Hull-White one-factor model. Numerical tests demonstrate that the “poor man's" model is in fact sufficient to price Bermudan interest rate swaptions. The main practical implication of this finding is that - once local volatility, dividend and short rate parameters are properly stripped from the volatility surface and interest rate curve - one can readily use the widely popular equity derivatives software for pricing exotic interest rate options such as Bermudans.

Dariusz Gątarek Bio:

Dariusz Gątarek is a graduate in applied mathematics from the Warsaw University of Technology. Dariusz spent twenty years in many financial and advisory institutions such as BRE Bank, Societe Generale, Glencore, UniCredit, Deloitte and NumeriX. Specializing in valuing derivatives and designing risk management systems, Dariusz is currently working as professor at the Polish Academy of Sciences. Dariusz has published a number of articles on financial modelling, his paper ‘The Market Model of Interest Rate Dynamics’, co-authored with Brace and Musiela, is regarded as a classic. He is a frequent speaker at conferences worldwide.