Pricing swaptions on amortising swaps

Masutha, Ndinae Nico

Pricing swaptions on amortising swaps

Master Thesis

2018

Publisher

University of Cape Town

Department

African Institute of Financial Markets and Risk Management

Faculty

Faculty of Commerce

Abstract

In this dissertation, two efficient approaches for pricing European options on amortising swaps are explored. The first approach is to decompose the pricing of a European amortising swaption into a series of discount bond options, with an assumption that the interest rate follows a one-factor affine model. The second approach is using a one-dimensional numerical integral technique to approximate the price of European amortising swaption, with an assumption that the interest rate follows an additive two-factor affine model. The efficacy of the two methods was tested by making a comparison with the prices generated using Monte Carlo methods. Two methods were used to accelerate the convergence rate of the Monte Carlo model, a variance reduction method, namely the control variates technique and a method of using deterministic low-discrepancy sequences (also called quasi-Monte Carlo methods).

Keywords

Mathematical Finance

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