Abstract
In the context of multi-curve modeling we consider a two-curve setup, with one curve for discounting (OIS swap curve) and one for generating future cash flows (LIBOR for a give tenor). Within this context we present an approach for the clean-valuation pricing of FRAs and CAPs (linear and nonlinear derivatives) with one of the main goals being also that of exhibiting an “adjustment factor” when passing from the one-curve to the two-curve setting. The model itself corresponds to short rate modeling where the short rate and a short rate spread are driven by affine factors; this allows for correlation between short rate and short rate spread as well as to exploit the convenient affine structure methodology. We briefly comment also on the calibration of the model parameters, including the correlation factor.
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Acknowledgments
We are grateful to Giulio Miglietta as well as to Claudio Fontana and Zorana Grbac for very constructive comments.
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Morino, L., Runggaldier, W.J. (2014). On Multicurve Models for the Term Structure. In: Dieci, R., He, XZ., Hommes, C. (eds) Nonlinear Economic Dynamics and Financial Modelling. Springer, Cham. https://doi.org/10.1007/978-3-319-07470-2_16
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DOI: https://doi.org/10.1007/978-3-319-07470-2_16
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