6533b835fe1ef96bd129f310
RESEARCH PRODUCT
Closed Form Approximation of Swap Exposures
Heikki SeppäläSer-huang PoonSer-huang PoonThomas SchroderThomas Schrodersubject
SwaptionFinancial economicsmedia_common.quotation_subjectInterest ratesymbols.namesakeClosed form approximationBasis swapSwap (finance)HullEconomicssymbolsMean reversionApplied mathematicsGaussian network modelmedia_commondescription
This paper provides closed form lower and upper bounds for the price of European swaption on cross currency basis swap with the presence of dynamic basis spreads. Cross currency basis spreads are treated as integrals of spot spreads, approach familiar from interest rate models. The spot spread is modelled by two-factor mean reverting Gaussian model that is equivalent to two-factor Hull-White model introduced by [Hull and White(1994)]. This model allows closed form approximations and relatively well fitting and simple calibration to the spread term structure.
| year | journal | country | edition | language |
|---|---|---|---|---|
| 2013-01-01 | SSRN Electronic Journal |