Approximations of Bond and Swaption Prices in a Black-Karasiński Model
arXiv:1506.00697
Abstract
We derive semi-analytic approximation formulae for bond and swaption prices in a Black-Karasiński interest rate model. Approximations are obtained using a novel technique based on the Karhunen-Loève expansion. Formulas are easily computable and prove to be very accurate in numerical tests. This makes them useful for numerically efficient calibration of the model.