Volatility transformation in a multi-curve setting applied to caps and swaptions

 

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dc.contributor.advisor McWalter, Thomas en_ZA
dc.contributor.author Maxwell, Daniel en_ZA
dc.date.accessioned 2016-02-02T14:41:10Z
dc.date.available 2016-02-02T14:41:10Z
dc.date.issued 2015 en_ZA
dc.identifier.citation Maxwell, D. 2015. Volatility transformation in a multi-curve setting applied to caps and swaptions. University of Cape Town. en_ZA
dc.identifier.uri http://hdl.handle.net/11427/16693
dc.description Includes bibliographical references en_ZA
dc.description.abstract The effects of the 2007-08 financial crisis have resulted in a sharp change in the way interest rate markets are viewed as well as modelled. As a result of the crisis, the general market framework has transitioned from a single curve framework to what is commonly known as the 'multiple-curve' framework. In addition to this, there is debate as to which curve to use for discounting. This dissertation will initially aim to give a succinct, yet thorough overview of the changes affecting interest rate modelling as a result of the financial crisis. In particular pricing methods that are consistent with the multi-curve framework are presented. Adaptations of the popular Libor Market Model (LMM) and Stochastic Alpha-Beta-Rho (SABR) consistent with the new market framework are also presented. The second aim of the dissertation is to outline and implement methods of transforming volatilities within this new market framework. The market quotes available for caps/floors and swaptions often assume a particular payment tenor, for example swaption volatilities are typically quoted assuming payment legs of six months. As such, if one wanted to price an identical swaption based on payment legs of three months, or even monthly payments, some form of transformation is needed. The methods presented and implemented are largely based on the work of Kienitz (2013). The methods described are implemented to transform six month cap and swaption volatility surfaces to three month surfaces. en_ZA
dc.language.iso eng en_ZA
dc.subject.other Mathematical Finance en_ZA
dc.title Volatility transformation in a multi-curve setting applied to caps and swaptions en_ZA
dc.type Master Thesis
uct.type.publication Research en_ZA
uct.type.resource Thesis en_ZA
dc.publisher.institution University of Cape Town
dc.publisher.faculty Faculty of Commerce en_ZA
dc.publisher.department Division of Actuarial Science en_ZA
dc.type.qualificationlevel Masters
dc.type.qualificationname MPhil en_ZA
uct.type.filetype Text
uct.type.filetype Image
dc.identifier.apacitation Maxwell, D. (2015). <i>Volatility transformation in a multi-curve setting applied to caps and swaptions</i>. (Thesis). University of Cape Town ,Faculty of Commerce ,Division of Actuarial Science. Retrieved from http://hdl.handle.net/11427/16693 en_ZA
dc.identifier.chicagocitation Maxwell, Daniel. <i>"Volatility transformation in a multi-curve setting applied to caps and swaptions."</i> Thesis., University of Cape Town ,Faculty of Commerce ,Division of Actuarial Science, 2015. http://hdl.handle.net/11427/16693 en_ZA
dc.identifier.vancouvercitation Maxwell D. Volatility transformation in a multi-curve setting applied to caps and swaptions. [Thesis]. University of Cape Town ,Faculty of Commerce ,Division of Actuarial Science, 2015 [cited yyyy month dd]. Available from: http://hdl.handle.net/11427/16693 en_ZA
dc.identifier.ris TY - Thesis / Dissertation AU - Maxwell, Daniel AB - The effects of the 2007-08 financial crisis have resulted in a sharp change in the way interest rate markets are viewed as well as modelled. As a result of the crisis, the general market framework has transitioned from a single curve framework to what is commonly known as the 'multiple-curve' framework. In addition to this, there is debate as to which curve to use for discounting. This dissertation will initially aim to give a succinct, yet thorough overview of the changes affecting interest rate modelling as a result of the financial crisis. In particular pricing methods that are consistent with the multi-curve framework are presented. Adaptations of the popular Libor Market Model (LMM) and Stochastic Alpha-Beta-Rho (SABR) consistent with the new market framework are also presented. The second aim of the dissertation is to outline and implement methods of transforming volatilities within this new market framework. The market quotes available for caps/floors and swaptions often assume a particular payment tenor, for example swaption volatilities are typically quoted assuming payment legs of six months. As such, if one wanted to price an identical swaption based on payment legs of three months, or even monthly payments, some form of transformation is needed. The methods presented and implemented are largely based on the work of Kienitz (2013). The methods described are implemented to transform six month cap and swaption volatility surfaces to three month surfaces. DA - 2015 DB - OpenUCT DP - University of Cape Town LK - https://open.uct.ac.za PB - University of Cape Town PY - 2015 T1 - Volatility transformation in a multi-curve setting applied to caps and swaptions TI - Volatility transformation in a multi-curve setting applied to caps and swaptions UR - http://hdl.handle.net/11427/16693 ER - en_ZA


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