Pricing and risk management of interest rate swaps

Sovan Mitra, Paresh Date, Rogemar Mamon and I-Chieh Wang

European Journal of Operational Research, 2013, vol. 228, issue 1, 102-111

Abstract: This paper reformulates the valuation of interest rate swaps, swap leg payments and swap risk measures, all under stochastic interest rates, as a problem of solving a system of linear equations with random perturbations. A sequence of uniform approximations which solves this system is developed and allows for fast and accurate computation. The proposed method provides a computationally efficient alternative to Monte Carlo based valuations and risk measurement of swaps. This is demonstrated by conducting numerical experiments and so our method provides a potentially important real-time application for analysis and calculation in markets.

Keywords: Swaps; Risk management; Financial mathematics; Numerical analysis; Stochastic interest rates (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:228:y:2013:i:1:p:102-111

DOI: 10.1016/j.ejor.2012.11.032

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