Tuesday, 22 March 2022

New published paper: Swap Rate: cash settled swaptions in the fallback

We are pleased to announce that the research paper written by Marc and titled

Swap Rate: cash settled swaptions in the fallback

has been accepted for publication in Risk. The publication date will be announced later.

The preprint version of the paper is part of the muRisQ Advisory Model Development series of research papers. The paper results have been presented in different seminars and conferences, including the The 4th Interest Rate Reform Conference on 20 October 2021.


With the planned cessation of LIBOR, the LIBOR-based Swap Rates will also cease. For legacy transactions linked to it, a fallback is required. Some approximated fallback mechanisms have been proposed by working groups. The approximations involve some non-linear function of overnight-based swap rates. Due to the non-linearity, cash settled vanilla swaptions are becoming exotic products. Moreover, keeping the annuity unchanged while changing the rate to overnight-based swap generates technical issues in the pricing leading to convexity adjustments. The article proposes different pricing methodologies for those now exotic swaptions, including several price approximation to reduce the implementation numerical complexity.