Hedging Interest-Rate Options Using Principal Components Analysis
| dc.contributor.author | Bhamani, Feroz | |
| dc.date.accessioned | 2019-02-04T12:01:15Z | |
| dc.date.available | 2019-02-04T12:01:15Z | |
| dc.date.issued | 2018 | |
| dc.date.updated | 2019-02-02T08:29:07Z | |
| dc.description.abstract | It is often a goal of the risk management of a portfolio of interest rate sensitive instruments to minimize the impact of movements in market rates on the value of the portfolio. This can be done by considering the sensitivity of the portfolio to each of the market rates that are used to bootstrap a yield curve. However, this is likely to lead to an excessive amount of trading due to an investment in a large number of hedging securities. As an alternative, we consider using principal components analysis (PCA) to condense most of the variability in the market rates into a much smaller number of risk factors, called the principal components. One can then construct a hedging portfolio so as to make the portfolio immune to shocks in these principal components, and hence to the most common movements in the yield curve. We compare the effectiveness of these two hedging strategies for hedging a portfolio of interest-rate options, both in the absence and presence of transaction costs. We also consider the additional feature of being able to update each hedging methodology on a daily basis and rebalance the hedge portfolios accordingly. | |
| dc.identifier.apacitation | Bhamani, F. (2018). <i>Hedging Interest-Rate Options Using Principal Components Analysis</i>. (). University of Cape Town ,Faculty of Commerce ,African Institute of Financial Markets and Risk Management. Retrieved from http://hdl.handle.net/11427/29250 | en_ZA |
| dc.identifier.chicagocitation | Bhamani, Feroz. <i>"Hedging Interest-Rate Options Using Principal Components Analysis."</i> ., University of Cape Town ,Faculty of Commerce ,African Institute of Financial Markets and Risk Management, 2018. http://hdl.handle.net/11427/29250 | en_ZA |
| dc.identifier.citation | Bhamani, F. 2018. Hedging Interest-Rate Options Using Principal Components Analysis. University of Cape Town. | en_ZA |
| dc.identifier.ris | TY - Thesis / Dissertation AU - Bhamani, Feroz AB - It is often a goal of the risk management of a portfolio of interest rate sensitive instruments to minimize the impact of movements in market rates on the value of the portfolio. This can be done by considering the sensitivity of the portfolio to each of the market rates that are used to bootstrap a yield curve. However, this is likely to lead to an excessive amount of trading due to an investment in a large number of hedging securities. As an alternative, we consider using principal components analysis (PCA) to condense most of the variability in the market rates into a much smaller number of risk factors, called the principal components. One can then construct a hedging portfolio so as to make the portfolio immune to shocks in these principal components, and hence to the most common movements in the yield curve. We compare the effectiveness of these two hedging strategies for hedging a portfolio of interest-rate options, both in the absence and presence of transaction costs. We also consider the additional feature of being able to update each hedging methodology on a daily basis and rebalance the hedge portfolios accordingly. DA - 2018 DB - OpenUCT DP - University of Cape Town LK - https://open.uct.ac.za PB - University of Cape Town PY - 2018 T1 - Hedging Interest-Rate Options Using Principal Components Analysis TI - Hedging Interest-Rate Options Using Principal Components Analysis UR - http://hdl.handle.net/11427/29250 ER - | en_ZA |
| dc.identifier.uri | http://hdl.handle.net/11427/29250 | |
| dc.identifier.vancouvercitation | Bhamani F. Hedging Interest-Rate Options Using Principal Components Analysis. []. University of Cape Town ,Faculty of Commerce ,African Institute of Financial Markets and Risk Management, 2018 [cited yyyy month dd]. Available from: http://hdl.handle.net/11427/29250 | en_ZA |
| dc.language.iso | eng | |
| dc.publisher.department | African Institute of Financial Markets and Risk Management | |
| dc.publisher.faculty | Faculty of Commerce | |
| dc.publisher.institution | University of Cape Town | |
| dc.subject.other | Mathematical Finance | |
| dc.title | Hedging Interest-Rate Options Using Principal Components Analysis | |
| dc.type | Master Thesis | |
| dc.type.qualificationlevel | Masters | |
| dc.type.qualificationname | MPhil |