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Pricing and risk management of interest rate swaps

  • Mitra, Sovan
  • Date, Paresh
  • Mamon, Rogemar
  • Wang, I-Chieh
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    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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    File URL: http://www.sciencedirect.com/science/article/pii/S0377221712008843
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    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
    Contact details of provider: Web page: http://www.elsevier.com/locate/eor

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