Skip to main content

Main menu

  • Home
  • Current Issue
  • Past Issues
  • Videos
  • Submit an article
  • More
    • About JFI
    • Editorial Board
    • Published Ahead of Print (PAP)
  • IPR Logo
  • About Us
  • Journals
  • Publish
  • Advertise
  • Videos
  • Webinars
  • More
    • Awards
    • Article Licensing
    • Academic Use
  • Follow IIJ on LinkedIn
  • Follow IIJ on Twitter

User menu

  • Sample our Content
  • Request a Demo
  • Log in

Search

  • ADVANCED SEARCH: Discover more content by journal, author or time frame
The Journal of Fixed Income
  • IPR Logo
  • About Us
  • Journals
  • Publish
  • Advertise
  • Videos
  • Webinars
  • More
    • Awards
    • Article Licensing
    • Academic Use
  • Sample our Content
  • Request a Demo
  • Log in
The Journal of Fixed Income

The Journal of Fixed Income

ADVANCED SEARCH: Discover more content by journal, author or time frame

  • Home
  • Current Issue
  • Past Issues
  • Videos
  • Submit an article
  • More
    • About JFI
    • Editorial Board
    • Published Ahead of Print (PAP)
  • Follow IIJ on LinkedIn
  • Follow IIJ on Twitter

A Resolution to Valuation Conflicts of Swaptions/Caps and OIS/LIBOR

Ren-Raw Chen, Pei-Lin Hsieh, Jeffrey Huang and Joe Huang
The Journal of Fixed Income Winter 2019, 28 (3) 68-87; DOI: https://doi.org/10.3905/jfi.2018.28.3.068
Ren-Raw Chen
is a professor of finance and business economics at Fordham University, Gabelli School of Business, in New York, NY
  • Find this author on Google Scholar
  • Find this author on PubMed
  • Search for this author on this site
Pei-Lin Hsieh
is an assistant professor of finance at Xiamen University, Wang Yanan Institute for Studies in Economics, in Xiamen, China
  • Find this author on Google Scholar
  • Find this author on PubMed
  • Search for this author on this site
Jeffrey Huang
is a deputy director at Big Data Analytics Application Lab at NCCU in Taipei, Taiwan
  • Find this author on Google Scholar
  • Find this author on PubMed
  • Search for this author on this site
Joe Huang
is a quantitative analyst at KGI Bank in Taipei, Taiwan
  • Find this author on Google Scholar
  • Find this author on PubMed
  • Search for this author on this site
  • Article
  • Info & Metrics
  • PDF (Subscribers Only)
Loading

Click to login and read the full article.

Don’t have access? Click here to request a demo 
Alternatively, Call a member of the team to discuss membership options
US and Overseas: +1 646-931-9045
UK: 0207 139 1600

Abstract

In this article, the authors provide a unified valuation framework under which a multicurve economy can be established and caps/floors and swaptions can be consistently priced. Furthermore, if a lognormal distribution is employed for the forward price (or 1 plus forward rate), then a “model-free” volatility calibration can be achieved, and all swaptions and caps/floors are perfectly repriced.

This article leverages earlier work by Chen, Hsieh, and Huang (2017) who fix a crucial drift-adjustment problem of the traditional LIBOR market model (LMM) where the LIBOR rates follow a lognormal distribution. By assuming 1 + LIBOR to be lognormal (hence LIBOR is shifted lognormal), Chen, Hsieh, and Huang achieve an exact and deterministic drift-adjustment term. In this article, they extend the model to provide a perfect calibration to both swaptions and caps/floors (which is not doable under the traditional LMM), and by using a foreign currency analogy, they show that the model supports multiple curves, which is a key element to overnight index swap (OIS) discounting.

TOPICS: Options, quantitative methods

  • © 2018 Pageant Media Ltd
View Full Text

Don’t have access? Click here to request a demo

Alternatively, Call a member of the team to discuss membership options

US and Overseas: +1 646-931-9045

UK: 0207 139 1600

Log in using your username and password

Forgot your user name or password?
PreviousNext
Back to top

Explore our content to discover more relevant research

  • By topic
  • Across journals
  • From the experts
  • Monthly highlights
  • Special collections

In this issue

The Journal of Fixed Income: 28 (3)
The Journal of Fixed Income
Vol. 28, Issue 3
Winter 2019
  • Table of Contents
  • Index by author
  • Complete Issue (PDF)
Print
Download PDF
Article Alerts
Sign In to Email Alerts with your Email Address
Email Article

Thank you for your interest in spreading the word on The Journal of Fixed Income.

NOTE: We only request your email address so that the person you are recommending the page to knows that you wanted them to see it, and that it is not junk mail. We do not capture any email address.

Enter multiple addresses on separate lines or separate them with commas.
A Resolution to Valuation Conflicts of Swaptions/Caps and OIS/LIBOR
(Your Name) has sent you a message from The Journal of Fixed Income
(Your Name) thought you would like to see the The Journal of Fixed Income web site.
CAPTCHA
This question is for testing whether or not you are a human visitor and to prevent automated spam submissions.
Citation Tools
A Resolution to Valuation Conflicts of Swaptions/Caps and OIS/LIBOR
Ren-Raw Chen, Pei-Lin Hsieh, Jeffrey Huang, Joe Huang
The Journal of Fixed Income Dec 2018, 28 (3) 68-87; DOI: 10.3905/jfi.2018.28.3.068

Citation Manager Formats

  • BibTeX
  • Bookends
  • EasyBib
  • EndNote (tagged)
  • EndNote 8 (xml)
  • Medlars
  • Mendeley
  • Papers
  • RefWorks Tagged
  • Ref Manager
  • RIS
  • Zotero
Save To My Folders
Share
A Resolution to Valuation Conflicts of Swaptions/Caps and OIS/LIBOR
Ren-Raw Chen, Pei-Lin Hsieh, Jeffrey Huang, Joe Huang
The Journal of Fixed Income Dec 2018, 28 (3) 68-87; DOI: 10.3905/jfi.2018.28.3.068
del.icio.us logo Digg logo Reddit logo Twitter logo Facebook logo Google logo LinkedIn logo Mendeley logo
Tweet Widget Facebook Like LinkedIn logo

Jump to section

  • Article
    • Abstract
    • THE EXACT DRIFT ADJUSTMENT
    • CONSISTENT VALUATION OF CAPS/FLOORS AND SWAPTIONS
    • DEMONSTRATION OF CALIBRATION MODEL
    • SIMULATIONS
    • A MULTICURVE ECONOMY: AN FX ANALOGY
    • CONCLUSION AND EXTENSIONS
    • APPENDIX
    • ENDNOTES
    • REFERENCES
  • Info & Metrics
  • PDF

Similar Articles

Cited By...

  • No citing articles found.
  • Google Scholar
LONDON
One London Wall, London, EC2Y 5EA
United Kingdom
+44 207 139 1600
 
NEW YORK
41 Madison Avenue, New York, NY 10010
USA
+1 646 931 9045
reply@pm-research.com
 

Stay Connected

  • Follow IIJ on LinkedIn
  • Follow IIJ on Twitter

MORE FROM PMR

  • Home
  • Awards
  • Investment Guides
  • Videos
  • About PMR

INFORMATION FOR

  • Academics
  • Agents
  • Authors
  • Content Usage Terms

GET INVOLVED

  • Advertise
  • Publish
  • Article Licensing
  • Contact Us
  • Subscribe Now
  • Log in
  • Update your Profile
  • Give us your feedback

© 2023 With Intelligence Ltd | All Rights Reserved | ISSN: 1059-8596 | E-ISSN: 2168-8648

  • Site Map
  • Terms & Conditions
  • Privacy Policy
  • Cookies