Libor market model thesis

The LIBOR Scandal has been getting quite a bit of press over the past few weeks as the web of investigations, settlements and accusations comparative essay french and haitian revolution to grow. Wwu admissions essay for. The final chapter libor scandal thesis this dissertation libor scandal thesis an insight into what a nexus.

Libor market model thesis

Banks can trade credit risk, thus lowering the regulatory capital bound. This effect could become stronger under the new Basel Capital Accord. The accord stipulates the amount of regulatory capital bound, due to credit exposure, is dependent upon the credit standing of the debtor.

While under the current Accord, only credit derivatives sold by other banks and regulated security firms give lower risk weights, under the new accord this treatment is being extended to protection provided by high-quality non-banks, such as insurance companies.

Theoretically it is possible to short corporate bonds on the spot market by means of repurchase agreements repos. However, this market is virtually non-existent and if it exists, long maturities are not available according to Houweling and Vorst Moreover, repo transactions on the spot market expose the investor to the risk of change in the repo rate.

Credit derivatives on the other hand eliminate this risk, as payments other than payments due to default are being agreed upon when specifying the contract.

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Also very long maturities of up to ten years are available although liquidity is small at the long end. The efficiency of portfolio management thus has been improved. Today more than thirty banks have global credit derivatives trading operations. According to Davies et al.

Enron was a major player in the credit derivatives market as it actively traded derivatives, as well as being a reference credit for numerous contracts. Apparently the market does not suffer from a sustainable distortion due to the Enron default.

The growing importance of credit derivatives creates the need to price them in a market consistent manner. The thesis consists of two main parts: The second part also reports results of our implementation.

The first part begins with a description of the default free Libor market model byMiltersen, Sandmann, and Sondermann Various mathematical tools, such as the change of measure and several fundamental theorems are introduced. The chapter ends with an presentation of closed form solutions for interest rate derivative prices.

CiteSeerX — Citation Query Non-Recombining Trees for the Pricing of Interest Rate Derivatives

The dynamics of various variables under different measures are derived, thus providing a framework that allows pricing credit derivatives. The third chapter is dedicated to issues connected with recovery. In the last chapter of part one credit derivatives are described and theoretical pricing formulae are given.

Part two is split into chapters five and six. In chapter five calibration issues are discussed. In particular, methods to extract the necessary data from market data are described. In chapter six our implementation of the model and simulations results are presented.The LIBOR Market Model is covered in Section 4 where we present theoretical aspects but mainly focus on calibrating the model to data.

Libor market model thesis

The model parameters, instantaneous volatilities and instantaneous correlations, are explored and their parameterization is justified%(1). Abstract This thesis studies the Libor market model and its application for measuring the counterparty credit risk exposure of interest rate derivatives.

A Libor Market Model Approach for Measuring Counterparty Credit Risk Exposure Junsheng Huang July 11, Master’s Thesis Supervisors: dr. . In this thesis the theory of the BGM Market Model is presented, as well as practical issues in such a way that the BGM Model resembles the market prices as closely as possible.

refer to the real market as the LIBOR market. 3 An interest rate option is a function of .

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3 In this thesis the model name, which will be used, is Libor Market model or LMM. 4 In this thesis forward Libor rates will also called forward rates or Libors.

5 LIBOR is usually quoted on 1, 3 . brief review of the equilibrium models, the no-arbitrage models, the LIBOR market models and the multi factor versions of some of them.

First, the equilibrium models: The thesis will be focused on parameter calibration of term structure models. It will be preceded by .

simulations - Exploding Libor Rates in Libor Market Model - Quantitative Finance Stack Exchange