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Assessing swaption portfolios for prepayment risk mitigation. A parametric perspective

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  • Monaco, Andrea

    (Center for Mathematical Economics, Bielefeld University)

  • Perrotta, Adamaria

    (Center for Mathematical Economics, Bielefeld University)

  • Sgarabottolo, Alessandro

    (Center for Mathematical Economics, Bielefeld University)

Abstract

We analyze the price behavior of Bermudan swaption portfolios used for hedging prepayment-driven interest rate risks in loan portfolios. We evaluate a variety of swaption portfolios across maturities and prepayment rates under various market conditions. Our findings reveal the existence of a parametric relation between swaption portfolio prices and the characteristics of the hedged loan. This relationship holds across different market conditions and valuation models, suggesting that one can swiftly adjust a swaption-based hedging strategy as loan portfolio characteristics evolve. This parametric approach allows financial institutions to reduce costs when assessing prepayment risks in their loan portfolios.

Suggested Citation

  • Monaco, Andrea & Perrotta, Adamaria & Sgarabottolo, Alessandro, 2025. "Assessing swaption portfolios for prepayment risk mitigation. A parametric perspective," Center for Mathematical Economics Working Papers 729, Center for Mathematical Economics, Bielefeld University.
    • Handle: RePEc:bie:wpaper:729
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    File URL: https://pub.uni-bielefeld.de/download/3006150/3006151
    File Function: First Version, 2023
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