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Accounting for roll-over risk in the pricing of caps and floors
The peak of the global financial crisis necessitated practitioners to rethink the single curve approach to pricing interest-rate derivatives. This was as a result of a violation in spot-forward parity relationships thereby prompting markets to realise the presence of a new type of risk and subsequen...
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| Format: | Thesis |
| Language: | English |
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African Institute of Financial Markets and Risk Management
2023
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| _version_ | 1867613164582993920 |
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| access_status_str | Open Access |
| author | Vidima, Sizwe |
| author2 | Backwell, Alex |
| author_browse | Backwell, Alex Vidima, Sizwe |
| author_facet | Backwell, Alex Vidima, Sizwe |
| author_sort | Vidima, Sizwe |
| collection | Thesis |
| description | The peak of the global financial crisis necessitated practitioners to rethink the single curve approach to pricing interest-rate derivatives. This was as a result of a violation in spot-forward parity relationships thereby prompting markets to realise the presence of a new type of risk and subsequently the need for a multi-curve pricing framework. The roll-over risk framework is one that accounts for liquidity constraints and default risk thereby providing a cogent explanation for the spotforward parity violation that led to the need for multiple curves. The primary objective of this work is to price XIBOR-based caps and floors under a framework which accounts for roll-over risk. This reformulation of interest-rate derivatives is achieved using Fourier Transform methods as well as Monte Carlo simulations for comparison. We found that the results obtained using the two approaches were comparable even though the two methods are different in nature. This agreement in prices is compelling evidence that the computations are correct. |
| format | Thesis |
| id | oai:open.uct.ac.za:11427/37033 |
| institution | University of Cape Town (South Africa) |
| language | eng |
| last_indexed | 2026-06-10T12:31:47.142Z |
| license_str | Not specified — see source repository |
| provenance_str_mv | Harvested via OAI-PMH from UCTD — University of Cape Town Open Access Repository |
| publishDate | 2023 |
| publishDateRange | 2023 |
| publishDateSort | 2023 |
| 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:11427/37033 Accounting for roll-over risk in the pricing of caps and floors Vidima, Sizwe Backwell, Alex Mathematical Finance The peak of the global financial crisis necessitated practitioners to rethink the single curve approach to pricing interest-rate derivatives. This was as a result of a violation in spot-forward parity relationships thereby prompting markets to realise the presence of a new type of risk and subsequently the need for a multi-curve pricing framework. The roll-over risk framework is one that accounts for liquidity constraints and default risk thereby providing a cogent explanation for the spotforward parity violation that led to the need for multiple curves. The primary objective of this work is to price XIBOR-based caps and floors under a framework which accounts for roll-over risk. This reformulation of interest-rate derivatives is achieved using Fourier Transform methods as well as Monte Carlo simulations for comparison. We found that the results obtained using the two approaches were comparable even though the two methods are different in nature. This agreement in prices is compelling evidence that the computations are correct. 2023-02-23T11:20:47Z 2023-02-23T11:20:47Z 2022 2023-02-21T07:27:53Z Master Thesis Masters MPhil http://hdl.handle.net/11427/37033 eng application/pdf African Institute of Financial Markets and Risk Management Faculty of Commerce |
| spellingShingle | Mathematical Finance Vidima, Sizwe Accounting for roll-over risk in the pricing of caps and floors |
| thesis_degree_str | Master's |
| title | Accounting for roll-over risk in the pricing of caps and floors |
| title_full | Accounting for roll-over risk in the pricing of caps and floors |
| title_fullStr | Accounting for roll-over risk in the pricing of caps and floors |
| title_full_unstemmed | Accounting for roll-over risk in the pricing of caps and floors |
| title_short | Accounting for roll-over risk in the pricing of caps and floors |
| title_sort | accounting for roll over risk in the pricing of caps and floors |
| topic | Mathematical Finance |
| url | http://hdl.handle.net/11427/37033 |
| work_keys_str_mv | AT vidimasizwe accountingforrolloverriskinthepricingofcapsandfloors |