Hedging LIBOR derivatives in a field theory model of interest rates

Belal E. Baaquie, Cui Liang and Mitch C. Warachka

Physica A: Statistical Mechanics and its Applications, 2007, vol. 374, issue 2, 730-748

Abstract: We investigate LIBOR-based derivatives using a parsimonious field theory interest rate model capable of instilling imperfect correlation between different maturities. Delta and Gamma hedge parameters are derived for LIBOR caps against fluctuations in underlying forward rates. An empirical illustration of our methodology is conducted to demonstrate the influence of correlation on the hedging of interest rate risk.

Keywords: Hedging; Quantum finance; Libor-based derivatives (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:374:y:2007:i:2:p:730-748

DOI: 10.1016/j.physa.2006.08.020

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