A Semi‐Explicit Approach to Canary Swaptions in HJM One‐Factor Model

Abstract

Leveraging the explicit formula for European swaptions and coupon‐bond options in the HJM one‐factor model, a semi‐explicit formula for 2‐Bermudan options (also called Canary options) is developed. The European swaption formula is extended to future times. So equipped, one is able to reduce the valuation of a 2‐Bermudan swaption to a single numerical integration at the first expiry date. In that integration the most complex part of the embedded European swaptions valuation has been simplified to perform it only once and not for every point. In a special but very common in practice case, a semi‐explicit formula is provided. Those results lead to a significantly faster and more precise implementation of swaption valuation. The improvements extend even more favourably to sensitivity calculations.