  We study a Markov-Functional (MF) interest-rate model with Uncertain
Volatility Displaced Diffusion (UVDD) digital mapping, which is consistent with
the volatility-smile phenomenon observed in the option market. We first check
the impact of pricing Bermudan swaptions by the model. Next, we also
investigate the future smiles implied by the MF models and the smile dynamics
implied by the UVDD model. Finally, we conduct hedging simulations against
Bermudan swaptions to test extensively the hedge performance of this
smile-consistenet MF model.
