Abstract
Several swap rate derivatives e.g. constant maturity swaps can only be valued after a convexity correction. One approach is to use a Taylor series expansion to gain an analytical approximation but the result is neither a tradeable asset nor can the information of the volatility cube be included. Another approach computes the convexity correction as a static portfolio of plain-vanilla swaptions. This portfolio approach has the advantage that the volatility cube can be incorporated by using a stochastic or local volatility model but it is the solution of an integral over an infinite number of strike prices.We propose an algorithm to approximate the replication portfolio with a finite and discrete set of strike prices. The accuracy of the method is examined in numerical studies using different valuation models and different sets of strike prices.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
