Print Email Facebook Twitter Pricing and hedging options in a negative interest rate environment Title Pricing and hedging options in a negative interest rate environment Author Frankena, L.H. Contributor Oosterlee, C.W. (mentor) Faculty Delft University of Technology Department EEMCS Programme Applied Mathematics Date 2016-02-29 Abstract This thesis is about pricing interest rate options in a negative interest rate environment and about pricing foreign exchange barrier options. Conventional interest rate option pricing models are unable to price interest rate options in the current negative interest rate environment. Displaced versions and free boundary versions of the conventional models are proposed as a solution. Also normal models are proposed as a solution. Moreover, it is important to use risk metrics consistent with the model. Foreign exchange barrier options are priced with local volatility, stochastic volatility and stochastic local volatility models. The valuation of a proprietary trading model is compared with industry standards such as the local volatility model and the constant parameter SABR model. Furthermore, it is compared with an extension of the SABR model with time dependent parameters. This time dependent SABR model can be calibrated to volatilities of multiple expiries, in contrast to the constant parameter SABR model. Finally, a local volatility component is added to guarantee a perfect calibration. Subject SABRtime dependent SABRnegative interest rateseffective parameterslocal volatilitystochastic local volatilitybarrier optionforeign exchangebachelier To reference this document use: http://resolver.tudelft.nl/uuid:9d9f59d6-4d63-4751-832d-a19e34219d7d Part of collection Student theses Document type master thesis Rights (c) 2016 Frankena, L.H. Files PDF thesis_LuukFrankena.pdf 1.11 MB Close viewer /islandora/object/uuid:9d9f59d6-4d63-4751-832d-a19e34219d7d/datastream/OBJ/view