scholarly journals Total Return Swap Valuation with Counterparty Risk and Interest Rate Risk

2014 ◽  
Vol 2014 ◽  
pp. 1-12 ◽  
Author(s):  
Anjiao Wang ◽  
Zhongxing Ye
Keyword(s):  
Interest Rate ◽  
Closed Form ◽  
Interest Rate Risk ◽  
Counterparty Risk ◽  
Rate Model ◽  
Change Of Measure ◽  
Market Interest Rate ◽  
Rate Risk ◽  
Interest Rate Model ◽  
The Interest Rate

We study the pricing of total return swap (TRS) under the contagion models with counterparty risk and the interest rate risk. We assume that interest rate follows Heath-Jarrow-Morton (HJM) forward interest rate model and obtain the Libor market interest rate. The cases where default is related to the interest rate and independent of interest rate are considered. Using the methods of change of measure and the “total hazard construction,” the joint default probabilities are obtained. Furthermore, we obtain the closed-form formulas of TRS under different contagion models, respectively.

scholarly journals Pricing of Embedded Options in Bank Deposits and Loans Based on Jump-Diffusion Interest Rate Model

Complexity ◽  
2021 ◽  
Vol 2021 ◽  
pp. 1-15
Author(s):  
Enlin Tang ◽  
Song Xu
Keyword(s):  
Interest Rate ◽  
Commercial Banks ◽  
Jump Diffusion ◽  
Interest Rate Risk ◽  
Rate Model ◽  
Interest Rate Marketization ◽  
Interest Rate Model ◽  
Embedded Options ◽  
The Interest Rate ◽  
Interest Margin

The marketization of interest rate is an inevitable requirement for China’s financial reform and joining the WTO to connect with the international financial market. It is also an important link to improve the marketization degree of China’s financial system. The marketization of interest rate in China is gradually advancing according to its preset mode. In the process of interest rate marketization, an unavoidable problem is that while the interest rate marketization gives the commercial banks the autonomy of capital pricing, the fluctuation of interest rate is more and more frequent. However, due to the fluctuation of interest rate, the loan as the main assets of commercial banks will be prepayed by borrowers, and the time deposit as the main liabilities of commercial banks will be withdrawn by depositors in advance; that is, embedded options are implied in asset liability items, which makes it difficult for commercial banks to accurately calculate the actual interest margin of deposits and loans and manage the interest rate risk. Therefore, it is of great significance to identify and price such embedded option value. On the basis of identifying and decomposing the embedded options in deposit and loan of commercial banks, according to the change characteristics of deposit and loan interest rate of Chinese commercial banks, this paper chooses jump-diffusion interest rate model to describe the change of benchmark interest rate of deposit and loan in China and demonstrates the advantages of this model compared with other models. Based on Monte Carlo simulation technology, the embedded options of five-year fixed deposit and ten-year prepayable loan in China are priced. On this basis, it points out that the real interest margin of commercial bank’s deposit and loan should be the nominal interest margin minus the value of deposit and loan’s embedded options. In the process of interest rate risk management, we should pay attention to the existence of embedded options and carry out effective management.

scholarly journals Quantifying the Interest Rate Risk of Banks: Assumptions Do Matter

2009 ◽  
Vol 15 (5) ◽  
pp. 1001-1018 ◽  
Author(s):  
Oliver Entrop ◽  
Marco Wilkens ◽  
Alexander Zeisler
Keyword(s):  
Interest Rate ◽  
Interest Rate Risk ◽  
Rate Risk ◽  
The Interest Rate

Theoretical Identifications of the Market Price of Risk under the Affine Interest Rate Model with Jumps

2005 ◽  
Vol 13 (2) ◽  
pp. 133-143
Author(s):  
Joon Hee Rhee
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Empirical Studies ◽  
Market Price ◽  
Rate Theory ◽  
Rate Model ◽  
Change Of Measure ◽  
Market Price Of Risk ◽  
Price Of Risk ◽  
Interest Rate Model

Any finance models must specify the market prices of risk that determines the relationship between the two probability measures. Although the general form of the change of measure is well known, few papers have investigated the change of measure for interest rate models and their implications for the way a model can fit to empirical facts about the behaviour of interest rates. This paper demonstrates that arbitrary specifications of market price of risk in empirical studies under the two factor affine interest rate model with jumps are not compatible with the theory of original interest rate model. Particularly, the empirical models of Duffee (2002) and Duarte (2003) may be wrong specifications in some parts under a rigorous theoretical interest rate theory.

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