Partial Payoff Swap Model
Partial payoff swap pays periodically, the payoff from a particular European style put option on the spread between respective ten and two-year CMS rates.
Pricing Partial Payoff Swap
Partial payoff swap pays periodically, the payoff from a particular European style put option on the spread between respective ten and two-year CMS rates. Moreover, this payoff is algebraically equivalent to the sum of the spread above and the payoff from a related European style put option.
Let
ten year maturity,
6-month JPY Libor paid semi-annually, in arrears,
a fixed rate paid semi-annually,
two year maturity,
6-month JPY Libor paid semi-annually, in arrears,
a fixed rate paid semi-annually.
Here one party must pay, semi-annually,
In addition the party receives period payments based on JPY Libor.
Moreover,
We note that the price is
which can be viewed as the payoff from a European style put option specified by
Let
where
Let
Then
where
are independent, standard Brownian motions.
and
are independent, standard Brownian motions. Observe that
Let
and assume that
where
and
are independent, standard Brownian motions. Let
References:
https://finpricing.com/lib/EqBarrier.html
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