Valuing Interest Rate Swap Contracts in Uncertain Financial Market

Chen Xiao, Yi Zhang and Zongfei Fu
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Chen Xiao: Department of Electrical and Computer Engineering, Stevens Institute of Technology, Hoboken, NJ 07030, USA
Yi Zhang: School of Information, Renmin University, Beijing 100872, China
Zongfei Fu: School of Information, Renmin University, Beijing 100872, China

Sustainability, 2016, vol. 8, issue 11, 1-10

Abstract: Swap is a financial contract between two counterparties who agree to exchange one cash flow stream for another, according to some predetermined rules. When the cash flows are fixed rate interest and floating rate interest, the swap is called an interest rate swap. This paper investigates two valuation models of the interest rate swap contracts in the uncertain financial market. The new models are based on belief degrees, and require relatively less historical data compared to the traditional probability models. The first valuation model is designed for a mean-reversion term structure, while the second is designed for a term structure with hump effect. Explicit solutions are developed by using the Yao–Chen formula. Moreover, a numerical method is designed to calculate the value of the interest rate swap alternatively. Finally, two examples are given to show their applications and comparisons.

Keywords: interest rate swap; uncertain process; uncertain differential equation; Yao-Chen formula (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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