In this paper an efficient calibration method for the multi-factor LIBOR Market Model (LMM) is proposed and is applied for the Japanese interest rate market. At first the joint calibration method in the cap and swaption market is demonstrated using a new parameterization for the correlation...

This paper analyzes a pentanomial lattice model for option pricing that incorporates skewness and kurtosis of the underlying asset. The lattice is constructed using a moment matching procedure, and explicit positivity conditions for branch probabilities are provided in terms of skewness and...

This paper highlights a framework for analysing dynamic hedging strategies under transaction costs. First, self-financing portfolio dynamics under transaction costs are modelled as being portfolio affine. An algorithm for computing the moments of the hedging error on a lattice under portfolio...