Pricing and risk management of interest rate swaps

Sovan Mitra, Paresh Date, Rogemar Mamonc, I-Chieh Wang

Research output: Contribution to journalArticle

Abstract

This paper reformulates the valuation of interest rate swaps, swap leg payments and swap risk measures, all under stochastic interest rates, as a problem of solving a system of linear equations with random perturbations. A sequence of uniform approximations which solves this system is developed and allows for
fast and accurate computation. The proposed method provides a computationally efficient alternative to Monte Carlo based valuations and risk measurement of swaps. This is demonstrated by conducting numerical experiments and so our method provides a potentially important real-time application for analysis and calculation in markets.
Original languageEnglish
Pages (from-to)102-111
Number of pages10
JournalEuropean Journal of Operational Research
Volume228
Issue number1
DOIs
Publication statusPublished - Jul 2013

Keywords

  • risk management
  • interest rates
  • risk analysis

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