Abstract
Term structure models are developed for the pricing of interest rate and asset hybrid structures. Two approaches are combined in models that have exact solutions for vanilla options and simple expressions for the fundamental financial variables, enabling efficient calibration and semi-analytic pricing. Multi-asset models are specified in terms of their numeraire and change-of-measure processes; here these basic components are represented as exponential-quadratic functions of affine semimartingale driving processes. The construction stays within the domain of analytic tractability, while providing multiple mechanisms for generating volatility smile. The models can thus be marked accurately to the vanilla market with additional control over the dynamics, a feature that is particularly useful when balancing the relationship between term and forward volatility in structures that are sensitive to both.
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