PT  - JOURNAL ARTICLE
AU  - Ren-Raw Chen
AU  - Xiaowei Li
AU  - Pei-Lin Hsieh
TI  - CMS Spread Options Pricing under the CHH Model
AID  - 10.3905/jfi.2023.1.155
DP  - 2023 Feb 02
TA  - The Journal of Fixed Income
PG  - jfi.2023.1.155
4099  - https://pm-research.com/content/early/2023/02/02/jfi.2023.1.155.short
4100  - https://pm-research.com/content/early/2023/02/02/jfi.2023.1.155.full
AB  - Based on the Chen, Hsieh, and Huang (2017) interest rate model, this research explores the analytical approach for pricing CMS spread options. We first derive a complex joint density for two swap rates composed of sequential forward rates and approximate the joint density by bivariate normals. After applying the methods of Pearson (1995) and Li, Deng, and Zhou (2008), we obtain two analytical pricing models and examine their accuracy using numerical analysis. Finally, we empirically show the predictive power of the implied volatility of CMS options for future economic states.