In this article, we apply the forward variance modeling approach by L.Bergomi to the co-terminal swap market model. We …

-Scholes result. We show that a swaption pricing formula is nothing more than the Black-76 formula scaled by the underlying swap … discuss how to evaluate and price an interest swap, which is the swaption underlying instrument. We proceed to examine how to … calculation. Finally applying the Radon-Nikodym derivative to change measure from the annuity measure to the savings account …

This paper presents an extensive test of the Libor Market on the Euro Cap and Swaption market. The deterministic LIBOR … performance show that the deterministic LIBOR market model is more effective in hedging in- and at-the money OTC caps and … swaptions. The simple extended LIBOR market model under the displaced diffusion dynamics is sufficient to model the Euro caplet …