Sunday 28 May 2023

New publication: Swap Rates Fallback and Term Structure Modelling

We are pleased to announce a new working paper titled

Swap Rates Fallback and Term Structure Modelling

is available in our muRisQ Advisory Model Development series of research papers. The paper is available on SSRN preprint repository at


The ISDA designed fallback for cash-settled swaptions with collateral discounting generates swap rate and term structure dependent exotics. To analyse precisely the fallback impact a full term structure of rates and volatility modelling is required. A recent paper Bang and Daboussi (2022) developed such an approach for swap rate based products like CMS. In this paper we apply those techniques to the valuation and risk management of the instruments resulting from the cash-settled and physical delivery swaption fallback. In doing so, we provide some model validation for the approximations previously proposed in this context.

All the results presented in the paper are based on a proprietary implementation extending a production grade open source quantitative finance library. We would be glad to provide model development or model validation advisory services based on the theoretical and practical development described in the paper. Don't hesitate to contact us if you require advisory services related to the interest rate modelling or benchmark transitions.