Template-Type: ReDIF-Paper 1.0
Author-Name: Pietersz, R.
Author-Name-Last: Pietersz
Author-Name-First: Raoul
Author-Person: ppi79
Author-Name: Pelsser, A.A.J.
Author-Name-Last: Pelsser
Author-Name-First: Antoon
Title: Risk managing bermudan swaptions in the libor BGM model
Abstract: This article presents a novel approach for calculating swap vega per bucket in the Libor BGM model. We show that for some forms of the volatility an approach based on re-calibration may lead to a large uncertainty in estimated swap vega, as the instantaneous volatility structure may be distorted by re-calibration. This does not happen in the case of constant swap rate volatility. We then derive an alternative approach, not based on re-calibration, by comparison with the swap market model. The strength of the method is that it accurately estimates vegas for any volatility function and at a low number of simulation paths. The key to the method is that the perturbation in the Libor volatility is distributed in a clear, stable and well understood fashion, whereas in the re-calibration method the change in volatility is hidden and potentially unstable.
Creation-Date: 2003-08-07
File-URL: https://repub.eur.nl/pub/904/ei200333.pdf
File-Format: application/pdf
Series: RePEc:ems:eureir
Number: EI 2003-33
Classification-JEL: G13
Keywords: bermudan swaptions, central interest rate model, libor BGM model, risk management, swap market model
Handle: RePEc:ems:eureir:904