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

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,