2020/04/09 by Willems, Sander
#Computational Finance (q-fin.CP) #FOS: Economics and business #Mathematical Finance (q-fin.MF) #Pricing of Securities (q-fin.PR) #Risk Management (q-fin.RM)
paper · doi:10.48550/arxiv.2004.04501
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.