Pricing Asian-style interest rate swaps

This research uses an extended Vasicek term structure model to derive closed-form solutions for Asian-style interest rate swaps, whose payoffs are determined by the average interest rates over a period between two consecutive settlement dates. The authors illustrate the pricing properties of Asian-style interest rate swaps and compare them with those of standard interest rate swaps. They show that an Asian-style interest rate swap does not necessarily cost less than a conventional interest rate swap in this framework. The key factors that make the swap rates of Asian-style and standard interest rate swaps different are the shape of the initial term structure of interest rates and the length of reset periods.