Affiliation

BMO

Main category

Economics (General Management)

Abstract

If an American swaption is exercised at a point that is not a reset date, in practice, the effective Libor rate at the point of exercise is a blended rate, which is linearly interpolated from a pair of Libor rates with respective accrual periods that bracket the remaining time interval to the next reset date. The effective Libor rate at the exercise point is taken to be the simple interest rate implied from the zero-coupon bond price to the next reset date. This treatment represents a compromise between accuracy and computational efficiency, since it avoids having to determine bracketing Libor rate values.

Link this presentation

https://science-media.org/presentation/628