An analytical formula for pricing interest rate swaps in terms of bond prices under the extended Cox-Ingersoll Ross model

Abstract

This paper presents an analytical formula for pricing interest rate swaps (IRSs) in terms of bond prices in which the interest rates are assumed to follow the extended Cox-Ingersoll-Ross model. Furthermore, we analytically investigate some asymptotic properties of the fair price of IRSs. Numerical tests are provided to demonstrate the accuracy and efficiency of our current approach compared with the Monte-Carlo simulations.

Keywords

• interest rate swaps
• bond prices
• analytical pricing formula
• extended cir model