Umeå University's logo

umu.sePublications
Change search
CiteExportLink to record
Permanent link

Direct link
Cite
Citation style
  • apa
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf
Swaption pricing and isolating volatility exposure
Umeå University, Faculty of Science and Technology, Department of Mathematics and Mathematical Statistics.
2011 (English)Independent thesis Basic level (degree of Bachelor), 10 credits / 15 HE creditsStudent thesis
Abstract [en]

Starting from basic financial mathematics, we cover the mathematics of pricing swaptions, options on interest rate swaps. We then continue to the topic of obtaining an approximately pure volatility exposure. This exposure to volatility, which in practice enables us to trade volatility according to our perceptions of the market, is obtained by buying or selling swaptions and appropriate amounts of the underlying interest rate swap contract. Taking offsetting positions in the underlying contract is called hedging and is covered in depth. We note that hedging can primarily be done in two ways, and discuss the advantages and disadvantages of each of them. After deriving the value formulas for such a swaption strategy aimed at isolating volatility exposure we end with a discussion on the transition from theory to practice.We find that this way of trading volatility is conceptually simple, but that pre-trade profitability analysis is difficult due to the sometimes poor availability of the sophisticated data needed to simulate such a swaption strategy. Despite the possible limitations in the data necessary to translate this theory into an experimental setup, this thesis serves as a good basis for further research on the profitability of a volatility trading strategy using interest rate swaptions.

Place, publisher, year, edition, pages
2011. , p. 45
Keywords [en]
swaption, option, volatility, swap, interest rate, black scholes, trading
National Category
Other Mathematics
Identifiers
URN: urn:nbn:se:umu:diva-44392OAI: oai:DiVA.org:umu-44392DiVA, id: diva2:420917
Uppsok
Physics, Chemistry, Mathematics
Available from: 2012-02-20 Created: 2011-06-07 Last updated: 2012-02-20Bibliographically approved

Open Access in DiVA

Swaption pricing and isolating volatility exposure(444 kB)14364 downloads
File information
File name FULLTEXT01.pdfFile size 444 kBChecksum SHA-512
0d980561ddbb53ed465cd24bed6895985c945888daee5630452d6402abc489e7549240a42977fa6003d31403c80335cffa1bf7391f466cdfb1d2e13c1d9e5efa
Type fulltextMimetype application/pdf

Search in DiVA

By author/editor
Forsberg, Tomas
By organisation
Department of Mathematics and Mathematical Statistics
Other Mathematics

Search outside of DiVA

GoogleGoogle Scholar
Total: 14366 downloads
The number of downloads is the sum of all downloads of full texts. It may include eg previous versions that are now no longer available

urn-nbn

Altmetric score

urn-nbn
Total: 509 hits
CiteExportLink to record
Permanent link

Direct link
Cite
Citation style
  • apa
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf