CAPPED EQUITY SWAPS UNDER THE DOUBLE-JUMP STOCHASTIC VOLATILITY MODEL WITH STOCHASTIC INTEREST RATES

Abstract

This study proposes a double-jump stochastic volatility model with stochastic interest rates to price capped equity swaps and other multi-period derivative securities. Closed-form solutions for capped equity swaps with a fixed or variable notional principle are derived. In addition, numerical examples are employed to analyze comparative statics properties, counterparts' risks, and the dynamics of the forward smile. (C) 2010 Wiley Periodicals, Inc. jrl Fut Mark 31:340-370, 2011