Pricing, Calibration and Hedging under the LIBOR model

Menziwa, Singalakha

Pricing, Calibration and Hedging under the LIBOR model

Thesis / Dissertation

2024

Abstract

This dissertation reviews work done by Dun et al. (2001). We present an algorithm for generating the LIBOR forward rates, which encompasses the functionality for pricing interest rate derivatives. We further generalise the algorithm to implement the predictor-corrector method. Calibration is carried out to price swaptions using the Black-76 and LIBOR methods, and the hedging strategies implied by both methods are considered. We aim to determine whether the theoretical and computational overhead associated with hedging swaptions using the LIBOR method improves the hedging accuracy over the more straightforward Black-76 method. The simulation is conducted within the LIBOR model framework. While inconsistent with the model assumptions, the Black method performed equally well as the LIBOR method as we obtained similar hedging profit and loss distributions even at high portfolio rebalancing frequencies.

Keywords

Finance and Tax

Reference:

Collections

Masters

Full item page