Prices of Caps and Swaptions under Multi-Factor LIBOR Market Models

• Main Authors: Shang-Chiun Chen, 陳尚群
• Other Authors: Meng-Lan Yueh
• Format: Others
• Language: en_US
• Published: 2005
• Online Access: http://ndltd.ncl.edu.tw/handle/28870951939546801818

碩士 === 國立中央大學 === 財務金融研究所 === 93 === In this paper, we find that for caps, when we assume volatilities are time-homogeneous or flat, 3-factor model is better than 1- and 2-factor model. For swaptions, no matter how many years expiration is, if the tenor is shorter (2 or 3 year), the pricing performance in the 3-factor mode is better than others. But if the tenor is longer (7 year), the pricing performance of the 3-factor model is not guaranteed to be better than that of other models. If we use time-homogeneous volatilities to evaluate caps or swaptions, pricing performance is very well in most situations. We have to notice this result. Because in the literatures, most of researchers always use parametric instantaneous volatilities (case 3) that are suggested by Rebonato (1998) to evaluate interest rate derivatives. However, we show in this paper that the pricing performance under a parametric instantaneous volatilities assumption might be not very satisfactory.