RT Journal Article
SR Electronic
T1 CMS Spread Options Pricing under the CHH Model
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP jfi.2023.1.155
DO 10.3905/jfi.2023.1.155
A1 Ren-Raw Chen
A1 Xiaowei Li
A1 Pei-Lin Hsieh
YR 2023
UL https://pm-research.com/content/early/2023/02/02/jfi.2023.1.155.abstract
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.