Valuation of volatility sensitive interest rate derivatives in an emerging market
by Jiri Witzany
International Journal of Financial Markets and Derivatives (IJFMD), Vol. 1, No. 4, 2010

Abstract: We 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.

Online publication date: Sun, 03-Oct-2010

The full text of this article is only available to individual subscribers or to users at subscribing institutions.

 
Existing subscribers:
Go to Inderscience Online Journals to access the Full Text of this article.

Pay per view:
If you are not a subscriber and you just want to read the full contents of this article, buy online access here.

Complimentary Subscribers, Editors or Members of the Editorial Board of the International Journal of Financial Markets and Derivatives (IJFMD):
Login with your Inderscience username and password:

Username:        Password:          Forgotten your password?

Want to subscribe?
A subscription gives you complete access to all articles in the current issue, as well as to all articles in the previous three years (where applicable). See our Orders page to subscribe.

If you still need assistance, please email subs@inderscience.com