CROSS CURRENCY EUROPEAN SWAPTION MODEL

A Cross Currency European Swaption is a European Swaption to enter into a swap to exchange cash flows in two different currencies. The domestic and foreign swap leg cash flows can be fixed or floating. The model outlined here is called a Multi-Currency Terminal Swap Rate Model which generalizes a Terminal Swap Rate Model to incorporate foreign exchange. The main idea behind a Terminal Swap Rate Model is to assume that the discount factors at the option maturity can be written as a function of the underlying swap rates. This assumption reduces the number of stochastic variables that need to be modelled