Valuation of volatility sensitive interest rate derivatives in an emerging market
AbstractWe investigate valuation of volatility sensitive interest rate derivatives like the derivatives involving LIBOR or swap rates in arrears. The paper studies several alternatives of the standard convexity adjustment formula, in particular, a precise analytical formula based on an assumption of log-normality of the underlying assets applicable to a wide class of derivatives. The second problem is estimation of interest rate volatilities and correlations that are used by the formulas. We analyse possible estimation methods including an application of the HJM, LIBOR market model and the swap market model. We argue that the latter is the best in a market where swap quotes are the primary source of market information on the term structure of interest rates dynamics. We illustrate the techniques and different results on a case study of a real life controversial exotic swap.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Inderscience Enterprises Ltd in its journal Int. J. of Financial Markets and Derivatives.
Volume (Year): 1 (2010)
Issue (Month): 4 ()
Contact details of provider:
Web page: http://www.inderscience.com/browse/index.php?journalID==307
interest rates; LIBOR; London Interbank Offered Rate; arrears; constant maturity swaps; convexity adjustments; swap market models; volatility valuation; emerging markets; swap rates; log-normality; underlying assets; David Heath; Robert Jarrow; Andrew Morton; HJM framework; swap quotes; market information; Prague; Deutsche Bank; Czech Republic; financial markets; derivatives; applied financial economics.;
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Graham Langley).
If references are entirely missing, you can add them using this form.