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Curve Building and SwapPricing in the Presence of Collateral and Basis Spreads
KTH, School of Engineering Sciences (SCI), Mathematics (Dept.), Mathematical Statistics.
2013 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

The eruption of the financial crisis in 2008 caused immense widening of both domestic and cross currency basis spreads. Also, as a majority of all fixed income contracts are now collateralized the funding cost of a financial institution may deviate substantially from the domestic Libor. In this thesis, a framework for pricing of collateralized interest rate derivatives that accounts for the existence of non-negligible basis spreads is implemented. It is found that losses corresponding to several percent of the outstanding notional may arise as a consequence of not adapting to the new market conditions.

Abstract [sv]

I samband med utbrottet av 2008 års finansiella kris vidgades många basisspreadar till ej tidigare skådade nivåer. Därtill krävs i dagsläget att säkerhet finns tillgänglig vid initieringen av en majoritet av alla räntekontrakt, vilket innebär att en banks finansieringskostnad kan avvika substantiellt från den inhemska interbankräntan. I detta examensarbete implementeras ett ramverk för prissättning av räntederivat som beaktar existensen av basisspreadar samt krav på säkerhet. Resultaten visar att förluster motsvarande flera procent av det nominella beloppet kan uppstå som konsekvens av att inte anpassa sig till det nya tillståndet på räntemarknaden.

Place, publisher, year, edition, pages
2013. , 64 p.
TRITA-MAT-E, 2013:19
Keyword [en]
Curve building, swap, basis spread, cross currency, collateral
National Category
Probability Theory and Statistics
URN: urn:nbn:se:kth:diva-122304OAI: diva2:622287
Subject / course
Mathematical Statistics
Educational program
Master of Science - Mathematics
Physics, Chemistry, Mathematics
Available from: 2013-05-21 Created: 2013-05-17 Last updated: 2013-05-21Bibliographically approved

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