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Arbitrage‐free construction of the swaption cube
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AbstractIn this paper we look at two areas in the interest rate options market where arbitrage could be hiding. In the first section we derive a no‐arbitrage condition for swaption prices with complementary expiry dates and tenors within the swaption cube. In the second section we propose an alternative European option approximation for the widely used SABR dynamics that reduces the possibility of arbitrage for long maturities and low strikes. Copyright © 2009 Wilmott Magazine Ltd
Title: Arbitrage‐free construction of the swaption cube
Description:
AbstractIn this paper we look at two areas in the interest rate options market where arbitrage could be hiding.
In the first section we derive a no‐arbitrage condition for swaption prices with complementary expiry dates and tenors within the swaption cube.
In the second section we propose an alternative European option approximation for the widely used SABR dynamics that reduces the possibility of arbitrage for long maturities and low strikes.
Copyright © 2009 Wilmott Magazine Ltd.
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