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Swaption pricing problem in uncertain financial market

  • Mathematical methods in data science
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Abstract

As an important interest rate derivative, swaption gives its owner the right but not the obligation to enter into an underlying interest rate swap, which helps them avoid interest rate risks from their core business or financing arrangements. How to find a reasonable swaption price is a core problem in finance. In order to overcome the paradox of stochastic finance theory, this paper proposes pricing formulae for payer swaption and receiver swaption by modeling the interest rate via uncertain differential equations. Furthermore, corresponding numerical methods are proposed to calculate swaptions’ prices when analytic forms are unavailable, and some examples are documented to illustrate the effectiveness of our methods.

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Acknowledgements

This work was supported by National Natural Science Foundation of China (No. 11771241) and (No. 62073009).

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Authors and Affiliations

  1. School of Reliability and Systems Engineering, Beihang University, Beijing, 100191, China

    Zhe Liu

  2. Department of Mathematical Sciences, Tsinghua University, Beijing, 100084, China

    Ying Yang

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  1. Zhe Liu
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  2. Ying Yang
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Correspondence to Zhe Liu.

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Liu, Z., Yang, Y. Swaption pricing problem in uncertain financial market. Soft Comput 26, 1703–1710 (2022). https://doi.org/10.1007/s00500-021-06702-4

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  • DOI: https://doi.org/10.1007/s00500-021-06702-4

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