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Pricing Hybrid Derivatives in the
LIBOR Market Model
Hybrid Derivatives
 PRDC (Power Reverse Dual Currency)
 Nikkei 225 Linked Multi-Callable
Maturity 20-30 years
Risks in Hybrid derivatives
• Volatility skew/smile of underlying
• Correlation between underlying and
interest rates
Hybrid LIBOR Market Model
• Spot FX rate
• Domestic Forward LIBOR Rates
Hybrid LIBOR Market Model
• Foreign forward LIBOR rates
FX Option Price
• Forward FX Rate
• FX Call Option Price
Asymptotic Expansion Method
• Simple example
• Taylor’s series expansion
Asymptotic FX Option Formula
• Forward FX rate
• Domestic forward LIBOR rates
• Foreign forward LIBOR rates
• Third order asymptotic expansion of forward FX
rate

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