SABR smiles for RFR caplets
Pricing of Securities
2020-05-07 v4 Computational Finance
Mathematical Finance
Risk Management
Abstract
We present a natural extension of the SABR model to price both backward and forward-looking RFR caplets in a post-Libor world. Forward-looking RFR caplets can be priced using the market standard approximations of Hagan et al. (2002). We provide closed-form effective SABR parameters for pricing backward-looking RFR caplets. These results are useful for smile interpolation and for analyzing backward and forward-looking smiles in normalized units.
Cite
@article{arxiv.2004.04501,
title = {SABR smiles for RFR caplets},
author = {Sander Willems},
journal= {arXiv preprint arXiv:2004.04501},
year = {2020}
}