Elias Daboussi (Bank of America Merrill Lynch)
Titre: Modelling of CMS-Linked Products in an RFR framework
Capitalizing on the Market’s adoption of Risk Free Rates (RFR) as benchmarks, we solve the problem of handling consistently single-expiry Interest Rates derivatives (e.g. CMS, CMS Spread-Options, Mid-Curves, Basket-Options etc..) in a way that respects the underlying swaps inter-dependencies as well as their volatilities across strikes and tenors, without resorting to arbitrary approximations routinely used in the industry. Introducing the convenient Annuity Due measure, we first show that the T-forward joint distribution of a family of RFR Swap Rates may be inferred explicitly from their options prices and correlation structure; we then design a numerical algorithm that allows the pricing of products sharing the same expiry using an efficient 1-step Monte Carlo scheme.