Back-of-the-envelope swaptions in a very parsimonious multicurve interest rate model

TL;DR

This paper introduces a simple, three-parameter multicurve interest rate model that provides exact closed-form pricing formulas for European swaptions and other vanilla derivatives, facilitating easier calibration.

Contribution

It presents a parsimonious extension of the Hull-White model to multicurve settings with exact formulas, improving simplicity and calibration for interest rate derivatives.

Findings

Provides a closed-form formula for swaptions in a multicurve model

Demonstrates ease of calibration for the proposed model

Extends Hull-White model to multicurve context with minimal parameters

Abstract

We propose an elementary model to price European physical delivery swaptions in multicurve setting with a simple exact closed formula. The proposed model is very parsimonious: it is a three-parameter multicurve extension of the two-parameter Hull-White (1990) model. The model allows also to obtain simple formulas for all other plain vanilla Interest Rate derivatives. Calibration issues are discussed in detail.