by Nick Denson
Abstract: The calculation of prices and sensitivities of exotic interest rate derivatives in the LIBOR market model is often very time consuming. To reduce the computational time we present a Markov-functional model as a control variate, building on work by Piterbarg, that works for pricing as well as vega sensitivities. The control variate is very effective, reducing the standard error of a five-factor, twenty-year Bermudan swaption by 10 times, which is an order of 100 times faster.
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