A Semi-Static Replication Method for Bermudan Swaptions under an Affine Multi-Factor Model
Jori Hoencamp,
Shashi Jain,
Drona Kandhai
Abstract:We present a semi-static replication algorithm for Bermudan swaptions under an affine, multi-factor term structure model. In contrast to dynamic replication, which needs to be continuously updated as the market moves, a semi-static replication needs to be rebalanced on just a finite number of instances. We show that the exotic derivative can be decomposed into a portfolio of vanilla discount bond options, which mirrors its value as the market moves and can be priced in closed form. This paves the way toward th… Show more
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