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Financial Markets and Portfolio Management

, Volume 31, Issue 4, pp 445–467 | Cite as

Valuation of certain CMS spreads

  • Ping Wu
  • Robert J. ElliottEmail author
Article
  • 122 Downloads

Abstract

In this paper, we derive an approximate lognormal process for the swap rate under the multifactor LIBOR market model using a Levy approach. Using the approximate dynamics for the swap rate, the constant maturity swap spread digital range notes with different strike rates are valued in analytic and semi-analytic form. The CMS spread digital range notes are widely traded in the marketplace, or embedded in structure notes.

Keywords

LIBOR market model Levy approach CMS spread digital range notes 

JEL Classification

G13 C63 

Notes

Acknowledgements

PW gratefully acknowledges the research supported by an open project of Jiangsu Key Laboratory of Financial Engineering and National Natural Science Foundation of China (71501099). RJE thanks the SSHRC and ARC for continuing support. Both authors thank the referees for helpful suggestions that improved the paper.

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Copyright information

© Swiss Society for Financial Market Research 2017

Authors and Affiliations

  1. 1.Jiangsu Key Laboratory of Financial EngineeringNanjing Audit UniversityNanjingChina
  2. 2.School of Mathematics and StatisticsNanjing University of Information Science and TechnologyNanjingChina
  3. 3.Haskayne School of BusinessUniversity of CalgaryAlbertaCanada
  4. 4.School of CommerceUniversity of South AustraliaAdelaideAustralia

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