Advanced Interest Rate Models (HJM and LMM) › Key Parameters
Michael BrenndoerferDecember 7, 20251 min read
Quantitative FinanceAll chapters Part 7 of 15Interest Rate Models and Derivatives
Advanced Interest Rate Models (HJM and LMM) › Key ParametersOne section · Sections in this chapter7 / 13 ↓
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The key parameters for swaption pricing are:
- S: Forward swap rate. The par rate that sets the swap's initial value to zero, observable from the current yield curve.
- K: Strike rate. The fixed rate specified in the swaption contract, chosen at inception and remaining fixed throughout the option's life.
- A: Annuity factor. The present value of the fixed leg's basis point payments, which converts rate differences into dollar values.
- T: Time to expiry. The time until the option is exercised, during which the swap rate may move in favor of or against the option holder.
- σ: Swaption volatility. The volatility of the forward swap rate used in Black's formula, typically implied from market prices.