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Hedging LIBOR Derivatives in a Field Theory Model of Interest Rates

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  • Belal E. Baaquie
  • Cui Liang
  • Mitch C. Warachka

Abstract

We investigate LIBOR-based derivatives using a parsimonious field theory interest rate model capable of instilling imperfect correlation between different maturities. Delta and Gamma hedge parameters are derived for LIBOR Caps against fluctuations in underlying forward rates. An empirical illustration of our methodology is also conducted to demonstrate the influence of correlation on the hedging of interest rate risk.

Suggested Citation

  • Belal E. Baaquie & Cui Liang & Mitch C. Warachka, 2005. "Hedging LIBOR Derivatives in a Field Theory Model of Interest Rates," Papers physics/0504221, arXiv.org, revised Feb 2006.
    • Handle: RePEc:arx:papers:physics/0504221
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