A special closed-form solution

As in section (5.2.2), we introduce the lEE technique by starting from a simpler model such that we obtain a closed-form solution for the option price. Then, the numerical approximations are directly comparable with the equivalent findings for the closed-form solution. Therefore, we derive the option pricing formula of a receiver swaption with only one (u = l) payment date in T.  

Then the price of a coupon bond option is given by ° 

Before the lEE can be appUed to compute the price of a 1x1 receiver swaption we have to rewrite (5.31) as follows 

Then the price of that swaption is given in terms of the underlying random variable P ToT ), together with the modified strike price 

From the 1x1 swaption formula (5.33) follows that the single exercise proh-abilities [l ] are given hy 

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