Pricing Interest Rate Swaps in Malaysia

Dick Davies, David Hillier, Andrew Marshall () and King Fui Cheah ()
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Dick Davies: Department of Accounting & Finance, University of Strathclyde, Glasgow, G4 0LN, Scotland, UK
David Hillier: Department of Accounting & Finance, University of Strathclyde, Glasgow, G4 0LN, Scotland, UK
Andrew Marshall: Department of Accounting & Finance, University of Strathclyde, Glasgow, G4 0LN, Scotland, UK
King Fui Cheah: United Overseas Bank (Malaysia) Bhd., Fixed Income & Derivatives Investment Banking Division, 18th Floor, Menara UOB, 50350 Kuala Lumpur, Malaysia

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2004, vol. 07, issue 04, 493-507

Abstract: This paper compares the theoretical price of interest rate swaps implied from the yield curve with the actual Kuala Lumpur Interbank Offer Rates used for swap resets in the Malaysian swap market for both semi-annual and annual interest rate swaps between 1996 and 2002. As far as we are aware no previous paper has considered pricing swaps in a less established derivative markets. Our empirical results indicate significant and persistent differences between the theoretical implied price and the actual reset price for both swaps over the sample period. This finding has implications for traders and banks in pricing swaps in Malaysia and more generally for pricing swaps in less established or illiquid markets or where capital controls have been introduced.

Keywords: Interest rate swaps; pricing; Malaysia; JEL Classification: G13; JEL Classification: G38 (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1142/S0219091504000251

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