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American Swaption A model is presented for pricing single-currency, American style fixed-for-floating interest rate swaptions We consider a single currency swap specified as follows, An American style swaption allows the holder to choose the entry point, into the tail of the swap, from a list of possible exercise times (e.g., a window of successive business days). We consider the “BK” method for valuing single-currency, fixed-for-floating interest rate, American style swaptions with features of the type described in Section 2. The BK method is an implementation of a “disconnected” tree discretization of a one factor Black-Karazinski (BK) risk-neutral short-rate process of the form below. Let r denote the short-interest rate. We consider a short-interest rate process such that r satisfies a risk-neutral SDE of the form A disconnected tree discretization of the short-rate process above is non-recombinant by design, but employs an interpolation scheme to approximate short-rate values at tree nodes along a time slice. Calibration is accomplished by matching, in a least squares sense, the model price against the market price for each respective European style payer swaption in a cache of calibration securities. The volatility break points are related to the forward start times of the respective swaptions in the calibration portfolio (see Section 4.2 for a typical specification). Given an American swaption,
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