Abstract
This research paper is intended at analyzing the interpolation of
LIBOR (London Inter Bank Offer Rate) Model PDE (Partial Differential
Equation) in one and two dimensions using Radial Basis Functions (RBF)
on full grids. The LIBOR Market model is considered an effective and
standard approach for pricing the derivatives which is based on interest
rates. In recent times, Monte Carlo methods are often used in practice
to price derivatives instruments because of the high dimensionality of the
model. This research paper highlights the applicability of the RBF method
rather than Finite Difference Method (FDM) for solving the LMM PDE,
LIBOR Market Model, with the Bermudan Swaption or Chooser Option
as a boundary condition. The results have suggested faster convergence
to reference value than FDM in one dimension. Also, the calculation of
price is similar to FDM in two dimension.
S. Z. Rezaei Lalami, Jeremy Levesley, Muhammad F. Sajjad. (2018) Radial Basis Function Solution for the LIBOR Market Model PDE, Punjab University Journal of Mathematics, Volume 50, Issue 4.
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