Pricing of Cash Settled Swaptions by the Replication Formula

Abstract

This note shows how to value cash settled swaptions using the replication formula normally used for valuing European type of options, in which the pay-off is given as a function of the underlying swap rate. A section showing how to do exact calculations of sensitivity key-figures from a stochastic volatility model with auto differentiation is also included. Nothing new is presented, this note simply demonstrates how to put things together in order to develop a framework for valuing cash settled swaptions.