Interest Rate Convexity and the Volatility Smile
When pricing the convexity effect in irregular interest rate derivatives such
as, e.g., Libor-in-arrears or CMS, one often ignores the volatility smile,
which is quite pronounced in the interest rate options market. This note
solves the problem of convexity by replicating the irregular interest flow or
option with liquidly traded options with different strikes thereby taking into
account the volatility smile…
Key words: interest rate options, volatility smile, convexity, option replicationZurück zu "Publications"