Barrier swaption pricing formulae of mean-reverting model in uncertain environment. (July 2022)

• Record Type: Journal Article
• Authors: Lu, Jing; Yang, Xiangfeng; Tian, Miao
• Is Part Of: Chaos, solitons and fractals. Volume 160(2022)
• Publication Date: 2022-07
• Subjects: Uncertain finance -- Barrier swaption -- Mean-reverting model -- Minimum cover estimation; Chaotic behavior in systems -- Periodicals; Solitons -- Periodicals; Fractals -- Periodicals; Chaotic behavior in systems; Fractals; Solitons; Periodicals; 003.7
• DOI: 10.1016/j.chaos.2022.112203
• Languages: English
• ISSNs: 0960-0779

Abstract

Abstract: Barrier swaption is an exotic option, in which the option purchaser has the right to decide whether the swaption will come into effect within a period and it becomes effective (invalid) only when the underlying rises (falls) to the barrier price. This paper studies four kinds of barrier swaptions based on the mean-reverting model, which are up-and-in payer swaption, down-and-in receiver swaption, down-and-out payer swaption, up-and-out receiver swaption, and the price calculation formulae are given. Then, the related parameters are calculated by the minimum cover estimation method. Finally, the examples are given. Highlights: This paper investigates the barrier swaption pricing problem in an uncertain environment. Based on the mean-reverting model, four types of pricing formulas are derived. The minimum cover estimation method is used to estimate the parameters of the uncertain differential equation. The corresponding numerical algorithms are given.