Title page for ETD etd-06272012-122904

Document Type Master's Dissertation
Author Klynsmith, Kepler Vincent
URN etd-06272012-122904
Document Title The Libor market model and its calibration to the South African market
Degree MSc
Department Mathematics and Applied Mathematics
Advisor Name Title
Prof E Mare Supervisor
  • calibration
  • Libor market
  • South African market
Date 2012-04-13
Availability unrestricted
The South African interest rate market has mainly been focused on vanilla interest rate products and hence can be seen as underdeveloped in this regard when compared, for instance, to the associated equity market. Market participants subscribe this aspect to a lack of demand and sophistication of investors within the market. This is, however, expected to change given the influx of international banks into the South African market over the past couple of years.

The current market methodology, for the pricing of vanilla interest rate options in the South African market, is the standard Black model with some mechanism to incorporate interest rate smiles. This mechanism is typically in the form of the SABR model. The most signicant drawback of this approach is the fact that it models each forward rate in isolation. Hence, there is no way to incorporate the joint dynamics between different forward rates and consequently cannot be used for the pricing of exotic interest rate options.

In anticipation of these new market developments, we explore the possibility of calibrating the LIBOR market model to the South African market. This dissertation follows a bottom up approach and hence considers all aspects associated with such an implementation. The work mainly focuses on the calibration to at-the-money interest rate options. A possible extension to the SABR model, while remaining within the LMM framework, is considered in the final chapter.

Copyright 2011, University of Pretoria. All rights reserved. The copyright in this work vests in the University of Pretoria. No part of this work may be reproduced or transmitted in any form or by any means, without the prior written permission of the University of Pretoria

Please cite as follows:

Klynsmith, KV 2011, The Libor market model and its calibration to the South African market, MSc dissertation, University of Pretoria, Pretoria, viewed yymmdd < http://upetd.up.ac.za/thesis/available/etd-06272012-122904 / >


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