OPTIONS ON NORMAL UNDERLYINGS WITH AN APPLICATION
TO THE PRICING OF SURVIVOR SWAPTIONS
Paul Dawson, David Blake, A.J.G Cairns and Kevin Dowd
Survivor derivatives are gaining considerable attention in both the
academic and practitioner communities. Early trading in such products
has generally been confined to products with linear payoffs, both funded
(bonds) and unfunded (swaps). History suggests that successful linear
payoff derivatives are frequently followed by the development of option-based
products. The random variable in the survivor swap pricing methodology
developed by Dowd et al [2006] is (approximately) normally, rather than
lognormally, distributed and thus a survivor swaption calls for an option pricing
model in which the former distribution is incorporated. We derive such a model
here, together with the Greeks and present a discussion of its application to the
pricing of survivor swaptions.