TITLE:
Valuation of Game Swaptions under the Generalized Ho-Lee Model
AUTHORS:
Aki Ebina, Natsumi Ochiai, Masamitsu Ohnishi
KEYWORDS:
Generalized Ho-Lee Model, Game Spot-Start Swaption, Game Forward-Start Swaption, Stochastic Game Formulation, Dynamic Programming Approach
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.6 No.5,
November
30,
2016
ABSTRACT: A game swaption, newly proposed in this paper, is a game version of usual interest-rate swaptions. It provides the both parties, fixed-rate payer and variable rate payer, with the right that they can choose an exercise time to enter a swap from a set of prespecified multiple exercise opportunities. We evaluate two types of game swaptions: game spot-start swaption and game forward-start swaption, under the generalized Ho-Lee model. The generalized Ho-Lee model is an arbitrage-free binomial-lattice interest-rate model. Using the generalized Ho-Lee model as a term structure model of interest rates, we propose an evaluation method of the arbitrage-free price for the game swaptions via a stochastic game formulation, and illustrate its effectiveness by some numerical results.