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The properties of interest rate swaps: An investigation of the price setting of illiquid interest rates swaps and the perfect hedging portfolios
KTH, School of Engineering Sciences (SCI), Mathematics (Dept.), Mathematical Statistics. (Matematisk statistik)
2012 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

The main purpose of this thesis is to analyze the properties of various types of simple interest rates swaps, investigate how they depend on the swap rates of the liquid instruments on the market and the OIS-rates, and analyze how an illiquid instrument should be priced and hedged. The price setting tool used by the Fixed Income division at SEB Merchant Banking has been analyzed, and simulations of the hedging portfolios have been done over a time span of one year.

The conclusions have been that it is impossible to hedge against the convex OIS rate dependence of the analyzed swaps and that, thought it might seem like a good idea, a dynamic hedge will lead to a much worse outcome than a static hedge

Place, publisher, year, edition, pages
2012. , 48 p.
Trita-MAT, ISSN 1401-2286 ; 2012:3
National Category
URN: urn:nbn:se:kth:diva-103176OAI: diva2:558730
Educational program
Master of Science in Engineering - Industrial Engineering and Management
Physics, Chemistry, Mathematics
Available from: 2012-10-04 Created: 2012-10-04 Last updated: 2012-10-04Bibliographically approved

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