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Pricing and risk management of interest rate swaps

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  • Mitra, Sovan
  • Date, Paresh
  • Mamon, Rogemar
  • Wang, I-Chieh
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    Abstract

    This paper reformulates the valuation of interest rate swaps, swap leg payments and swap risk measures, all under stochastic interest rates, as a problem of solving a system of linear equations with random perturbations. A sequence of uniform approximations which solves this system is developed and allows for fast and accurate computation. The proposed method provides a computationally efficient alternative to Monte Carlo based valuations and risk measurement of swaps. This is demonstrated by conducting numerical experiments and so our method provides a potentially important real-time application for analysis and calculation in markets.

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    Bibliographic Info

    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 228 (2013)
    Issue (Month): 1 ()
    Pages: 102-111

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    Handle: RePEc:eee:ejores:v:228:y:2013:i:1:p:102-111

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    Web page: http://www.elsevier.com/locate/eor

    Related research

    Keywords: Swaps; Risk management; Financial mathematics; Numerical analysis; Stochastic interest rates;

    References

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