0
$\begingroup$

can anyone guide me how to price a multi-legged swap and whether I need Monte Carlo / LMM based approach or if there is a closed form solution.

Receive leg "Libor 3m +1%"

Payment leg If Libor is greater than strike of 3%, then "Libor - 0.5%", else 3%

$\endgroup$
0
$\begingroup$

typically the 3M libor is set at the beginning of a 3M calculation period. If so, your payout is a simple combination of cap + a digital option on 0.5%. You do not need LMM on this. It would be an overkill. However, if your 3M libor is set differently, you might have to use convexity adjustment, or even worse, a path-dependence is introduced, then LMM.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.