ABSTRACT
Timeslicing consists of computing these conditional expectations backwards frommaturity to root across consecutive timeslices TR → TL in a semi-analytic fashion (integrating cubics against normal densities) using the fact that XTR conditioned on XTL is also normally distributed (see Section-A.2.1):
(XTR |XTL) ∼ N ¡ XTL , σ
2 [TR − TL] ¢
⇒
f (TL,XTL) = Z ∞ −∞
e−r[TR−TL]f ³ TR,XTL + σ
p TR − TLx
´ N1 (x) dx.
