Full Text Available
Note: Clicking the button above will open the full text document at the original institutional repository in a new window.
Hedging Interest-Rate Options Using Principal Components Analysis
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...
Saved in:
| Main Author: | |
|---|---|
| Format: | Thesis |
| Language: | English |
| Published: |
African Institute of Financial Markets and Risk Management
2019
|
| Subjects: | |
| Tags: |
No Tags, Be the first to tag this record!
|
| _version_ | 1867613259864997888 |
|---|---|
| access_status_str | Open Access |
| author | Bhamani, Feroz |
| author_browse | Bhamani, Feroz |
| author_facet | Bhamani, Feroz |
| author_sort | Bhamani, Feroz |
| collection | Thesis |
| description | 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. |
| format | Thesis |
| id | oai:open.uct.ac.za:11427/29250 |
| institution | University of Cape Town (South Africa) |
| language | eng |
| last_indexed | 2026-06-10T12:33:17.409Z |
| license_str | Not specified — see source repository |
| provenance_str_mv | Harvested via OAI-PMH from UCTD — University of Cape Town Open Access Repository |
| publishDate | 2019 |
| publishDateRange | 2019 |
| publishDateSort | 2019 |
| publisher | African Institute of Financial Markets and Risk Management |
| publisherStr | African Institute of Financial Markets and Risk Management |
| record_format | dspace |
| source_str | UCTD — University of Cape Town Open Access Repository |
| spelling | oai:open.uct.ac.za:11427/29250 Hedging Interest-Rate Options Using Principal Components Analysis Bhamani, Feroz Mathematical Finance 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. 2019-02-04T12:01:15Z 2019-02-04T12:01:15Z 2018 2019-02-02T08:29:07Z Master Thesis Masters MPhil http://hdl.handle.net/11427/29250 eng application/pdf African Institute of Financial Markets and Risk Management Faculty of Commerce University of Cape Town |
| spellingShingle | Mathematical Finance Bhamani, Feroz Hedging Interest-Rate Options Using Principal Components Analysis |
| thesis_degree_str | Master's |
| title | Hedging Interest-Rate Options Using Principal Components Analysis |
| title_full | Hedging Interest-Rate Options Using Principal Components Analysis |
| title_fullStr | Hedging Interest-Rate Options Using Principal Components Analysis |
| title_full_unstemmed | Hedging Interest-Rate Options Using Principal Components Analysis |
| title_short | Hedging Interest-Rate Options Using Principal Components Analysis |
| title_sort | hedging interest rate options using principal components analysis |
| topic | Mathematical Finance |
| url | http://hdl.handle.net/11427/29250 |
| work_keys_str_mv | AT bhamaniferoz hedginginterestrateoptionsusingprincipalcomponentsanalysis |