Simulated Swaption Delta-Hedging in the Lognormal Forward Libor Model

Dun, T; Barton, GW; Schlogl, E

Simulated Swaption Delta-Hedging in the Lognormal Forward Libor Model

Dun, T Barton, GW Schlogl, E

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Publisher:: World Scientific
Publication Type:: Journal Article
Citation:: International Journal of Theoretical & Applied Finance, 2001, 4 (4), pp. 677 - 709
Issue Date:: 2001-01

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Field	Value	Language
dc.contributor.author	Dun, T	en_US
dc.contributor.author	Barton, GW	en_US
dc.contributor.author	Schlogl, E https://orcid.org/0000-0001-8898-6879	en_US
dc.date.issued	2001-01	en_US
dc.identifier.citation	International Journal of Theoretical & Applied Finance, 2001, 4 (4), pp. 677 - 709	en_US
dc.identifier.issn	0219-0249	en_US
dc.identifier.uri	http://hdl.handle.net/10453/5447
dc.description.abstract	Alternative approaches to hedging swaptions are explored and tested by simulation. Hedging methods implied by the Black swaption formula are compared with a lognormal forward LIBOR model approach encompassing all the relevant forward rates. The simulation is undertaken within the LIBOR model framework for a range of swaptions and volatility structures. Despite incompatibilities with the model assumptions, the Black method performs equally well as the LIBOR method, yielding very similar distributions for the hedging prot and loss \| even at high rehedging frequencies. This result demonstrates the robustness of the Black hedging technique and implies that \| being simpler and generally better understood by nancial practitioners \| it would be the preferred method in practice.	en_US
dc.publisher	World Scientific	en_US
dc.relation.ispartof	International Journal of Theoretical & Applied Finance	en_US
dc.relation.isbasedon	10.1142/S0219024901001127	en_US
dc.subject.classification	Finance	en_US
dc.title	Simulated Swaption Delta-Hedging in the Lognormal Forward Libor Model	en_US
dc.type	Journal Article
utslib.citation.volume	4	en_US
utslib.for	140207 Financial Economics	en_US
utslib.for	150205 Investment and Risk Management	en_US
utslib.for	150201 Finance	en_US
utslib.for	01 Mathematical Sciences	en_US
utslib.for	15 Commerce, Management, Tourism and Services	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Science
pubs.organisational-group	/University of Technology Sydney/Faculty of Science/School of Mathematical and Physical Sciences
pubs.organisational-group	/University of Technology Sydney/Strength - QFRC - Quantitative Finance Research Centre
utslib.copyright.status	closed_access
pubs.consider-herdc	true	en_US
pubs.issue	4	en_US
pubs.volume	4	en_US

Abstract:

Alternative approaches to hedging swaptions are explored and tested by simulation. Hedging methods implied by the Black swaption formula are compared with a lognormal forward LIBOR model approach encompassing all the relevant forward rates. The simulation is undertaken within the LIBOR model framework for a range of swaptions and volatility structures. Despite incompatibilities with the model assumptions, the Black method performs equally well as the LIBOR method, yielding very similar distributions for the hedging prot and loss | even at high rehedging frequencies. This result demonstrates the robustness of the Black hedging technique and implies that | being simpler and generally better understood by nancial practitioners | it would be the preferred method in practice.

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http://hdl.handle.net/10453/5447