Swap Market Model: Theory and Empirical Evidence

Abstract

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Choice of Interest Rate Term Structure Models for Assets and Liability Management

“…Details of the derivation are given in the working paper by Gan, Guan and Poon (2007) [19]. The above equation is not an explicit function of S n,M (t)…”

“…P &L t+1 = (BSwn t − x 11,t S 11,t − x 5,t S 5,t − x 1,t S 1,t ) × (1 + y 0,t ) −(BSwn t+1 − x 11,t S 10,t+1 − x 5,t S 4,t+1 − x 1,t S 0,t+1 ) (19) where BSwn t is the value of the Bermudan swaption on day t; x τ,t are units of τ -year swap in the hedge portfolio; S τ,t is the value of τ -year swap on day t; and y 0,t is the current 1-year yield at t.…”

“…Therefore, equation (19) can be written as P &L t+1 = BSwn t ×(1+y 0,t )−BSwn t+1 +x 11,t S 10,t+1 +x 5,t S 4,t+1 +x 1,t S 0,t+1 .…”