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Applications of Gram-Charlier expansion and bond moments for pricing of interest rates and credit risk

By Keiichi Tanaka, Takeshi Yamada and Toshiaki Watanabe

Abstract

The purpose of this paper is to demonstrate the powerful and flexible applicability of the Gram-Charlier expansion to pricing of a wide variety of interest rate related products involving interest rate risk and credit risk. In this paper, we develop easily implemented approximations of the prices of several derivatives; swaptions, CMS, CMS options, and vulnerable options. Associated with the default risk, a survival contingent forward measure is constructed.Swaption, CMS, Affine term structure model, Convexity adjustment, Credit derivative, Survival contingent measure,

DOI identifier: 10.1080/14697680903193371
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