Efficient Monte Carlo simulations of pricing captions using Libor market models

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dc.contributor.advisorBecker, Ronalden_ZA
dc.contributor.authorMkhwanazi, MA (Mpendulo Armstrong)en_ZA
dc.date.accessioned2014-11-05T03:48:41Z
dc.date.available2014-11-05T03:48:41Z
dc.date.issued2013en_ZA
dc.descriptionIncludes bibliographical references.en_ZA
dc.description.abstractThe cap option (caption) is one of common European exotic options discussed in literature. This (interest rates) exotic option has no closed form solution and its accurate pricing and hedging in a volatile market is a challenge for traders. The reason for this is that, comparatively, the behaviour on an individual interest rate is more complex than that of a stock price. To price any interest rate product, it is essential to develop an interest rates model describing the behaviour of the entire zero coupon yield curve. The equity and yield curve, respectively, relate to the difference in the dynamics of a scalar variable and vector variable. Moreover, captions are second order with respect to the discount bonds in that they are options on caps (which are also options on bonds). These reasons make it of particular interest to study efficient numerical solutions to price captions. Monte Carlo simulation provides a simple method for pricing this option, and a suitable interest rate model to use is the Libor market model. The approach of describing the behaviour of the entire zero coupon yield curve, in the era post the 2007 credit crunch crisis, is what is called a standard single-curve market practice, and Part l of this work is based on it. . After introducing the framework for option pricing in the interest rate market, the theory and implementation procedure for Monte Carlo simulation using Libor market models is described. A detailed analysis of the results is presented together with a sensitivity analysis, and finally suggestions for efficient pricing of captions are given. In Part II we review the recent financial market evolution, triggered by the credit crunch crisis towards double-curve approach. Unfortunately, such a methodology is not easy to build. In practice an empirical approach to price and hedge interest rate derivatives has prevailed in the market. Future cash flows are generated through multiple forwarding yield curves associated to the underlying rate tenors, and their net present value is calculated through discount factors front a single discounting yield curve.en_ZA
dc.identifier.apacitationMkhwanazi, M. (. A. (2013). <i>Efficient Monte Carlo simulations of pricing captions using Libor market models</i>. (Thesis). University of Cape Town ,Faculty of Commerce ,Division of Actuarial Science. Retrieved from http://hdl.handle.net/11427/9114en_ZA
dc.identifier.chicagocitationMkhwanazi, MA (Mpendulo Armstrong). <i>"Efficient Monte Carlo simulations of pricing captions using Libor market models."</i> Thesis., University of Cape Town ,Faculty of Commerce ,Division of Actuarial Science, 2013. http://hdl.handle.net/11427/9114en_ZA
dc.identifier.citationMkhwanazi, M.(.A. 2013. Efficient Monte Carlo simulations of pricing captions using Libor market models. Thesis. University of Cape Town ,Faculty of Commerce ,Division of Actuarial Science. http://hdl.handle.net/11427/9114en_ZA
dc.identifier.ris TY - Thesis / Dissertation AU - Mkhwanazi, MA (Mpendulo Armstrong) AB - The cap option (caption) is one of common European exotic options discussed in literature. This (interest rates) exotic option has no closed form solution and its accurate pricing and hedging in a volatile market is a challenge for traders. The reason for this is that, comparatively, the behaviour on an individual interest rate is more complex than that of a stock price. To price any interest rate product, it is essential to develop an interest rates model describing the behaviour of the entire zero coupon yield curve. The equity and yield curve, respectively, relate to the difference in the dynamics of a scalar variable and vector variable. Moreover, captions are second order with respect to the discount bonds in that they are options on caps (which are also options on bonds). These reasons make it of particular interest to study efficient numerical solutions to price captions. Monte Carlo simulation provides a simple method for pricing this option, and a suitable interest rate model to use is the Libor market model. The approach of describing the behaviour of the entire zero coupon yield curve, in the era post the 2007 credit crunch crisis, is what is called a standard single-curve market practice, and Part l of this work is based on it. . After introducing the framework for option pricing in the interest rate market, the theory and implementation procedure for Monte Carlo simulation using Libor market models is described. A detailed analysis of the results is presented together with a sensitivity analysis, and finally suggestions for efficient pricing of captions are given. In Part II we review the recent financial market evolution, triggered by the credit crunch crisis towards double-curve approach. Unfortunately, such a methodology is not easy to build. In practice an empirical approach to price and hedge interest rate derivatives has prevailed in the market. Future cash flows are generated through multiple forwarding yield curves associated to the underlying rate tenors, and their net present value is calculated through discount factors front a single discounting yield curve. DA - 2013 DB - OpenUCT DP - University of Cape Town LK - https://open.uct.ac.za PB - University of Cape Town PY - 2013 T1 - Efficient Monte Carlo simulations of pricing captions using Libor market models TI - Efficient Monte Carlo simulations of pricing captions using Libor market models UR - http://hdl.handle.net/11427/9114 ER - en_ZA
dc.identifier.urihttp://hdl.handle.net/11427/9114
dc.identifier.vancouvercitationMkhwanazi M(A. Efficient Monte Carlo simulations of pricing captions using Libor market models. [Thesis]. University of Cape Town ,Faculty of Commerce ,Division of Actuarial Science, 2013 [cited yyyy month dd]. Available from: http://hdl.handle.net/11427/9114en_ZA
dc.language.isoengen_ZA
dc.publisher.departmentDivision of Actuarial Scienceen_ZA
dc.publisher.facultyFaculty of Commerceen_ZA
dc.publisher.institutionUniversity of Cape Town
dc.subject.otherMathematical Financeen_ZA
dc.titleEfficient Monte Carlo simulations of pricing captions using Libor market modelsen_ZA
dc.typeMaster Thesis
dc.type.qualificationlevelMasters
dc.type.qualificationnameMScen_ZA
uct.type.filetypeText
uct.type.filetypeImage
uct.type.publicationResearchen_ZA
uct.type.resourceThesisen_ZA
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