Simulated Swaption Delta-Hedging in the Lognormal Forward Libor Model
Alternative approaches to hedging swaptions are explored and tested by simulation. Hedging methods implied by the Balck swaption formula are compared with a lognormal forward LIBOR model approach encompassing all the relevant forward rates. The simulation is undertaken within the LIBOR model framework for a range of swaptions and volatility structures. Despite incompatibilities with the model assumptions, the Black method performs equally well as the LIBOR method, yielding very similar distributions for the hedging profit and loss - even at high rehedging frequencies. This result demonstrates the robustness of the Black hedging technique and implies that - being simpler and generally better understood by financial practitioners - it would be the preferred method in practice.
|Date of creation:||01 Mar 2000|
|Publication status:||Published as: Dun, T., Barton, G. and Schlogl, E., 2001, "Swaption Delta-Hedging in the Lognormal Forward Libor Model", International Journal of Theoretical and Applied Finance, 4(4), 517-528.|
|Contact details of provider:|| Postal: PO Box 123, Broadway, NSW 2007, Australia|
Phone: +61 2 9514 7777
Fax: +61 2 9514 7711
Web page: http://www.qfrc.uts.edu.au/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
- Dudenhausen, Antje & Erik Schloegl & Lutz Schloegl, 1999.
"Robustness of Gaussian Hedges and the Hedging of Fixed Income Derivatives,"
Discussion Paper Serie B
422, University of Bonn, Germany, revised Apr 1999.
- Antje Dudenhausen & Erik Schlögl & Lutz Schlögl, 1999. "Robustness of Gaussian Hedges and the Hedging of Fixed Income Derivatives," Research Paper Series 19, Quantitative Finance Research Centre, University of Technology, Sydney.
- Miltersen, K. & K. Sandmann & D. Sondermann, 1994.
"Closed Form Solutions for Term Structure Derivatives with Log-Normal Interest Rates,"
Discussion Paper Serie B
308, University of Bonn, Germany.
- Miltersen, Kristian R & Sandmann, Klaus & Sondermann, Dieter, 1997. " Closed Form Solutions for Term Structure Derivatives with Log-Normal Interest Rates," Journal of Finance, American Finance Association, vol. 52(1), pages 409-430, March.
- Marek Rutkowski & Marek Musiela, 1997. "Continuous-time term structure models: Forward measure approach (*)," Finance and Stochastics, Springer, vol. 1(4), pages 261-291.
When requesting a correction, please mention this item's handle: RePEc:uts:rpaper:40. See general 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: (Duncan Ford)
If references are entirely missing, you can add them using this form.