Main category
Economics (General Management)
Abstract
We note that the option price depends critically on the HW volatility level. We develop a technique to calibrate the HW volatility for GIC pricing. The idea is to associate a European swaption specification to the particular GIC specification. The HW volatility can then be determined by matching the HW model price for the swaption to the swaption's market price. We note that this technique may be highly sensitive to the selection of the associated swaption; moreover, this selection must reflect the hedging strategy for the GIC embedded option.
Further reading
https://ia601502.us.archive.org/7/items/gicOption/gicOption.pdf
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