Hedging LIBOR Derivatives in a Field Theory Model of Interest Rates

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

Papers from arXiv.org

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 also conducted to demonstrate the influence of correlation on the hedging of interest rate risk.

Date: 2005-04, Revised 2006-02
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