Valuation and Hedging of Correlation Swaps

Bachelor thesis (2017)

Authors

M.J. Draijer Electrical Engineering, Mathematics and Computer Science

Contributors

C.W. Oosterlee (supervisor 1)
P. Cirillo (supervisor 1)
E.M. van Elderen (supervisor 2)
W.M. Ruszel (supervisor 2)
Faculty
Electrical Engineering, Mathematics and Computer Science
Copyright: © 2017 Mats Draijer
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Published Date

22-09-2017

Language

English

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Faculty

Electrical Engineering, Mathematics and Computer Science

Abstract

The aim of this thesis is to provide a formula for the value of a correlation swap. To get to this formula, a model from an article by Bossu is inspected and its resulting expression for fair the fair value of a correlation swap is simulated. The Jacobi process will be defined and two discretization schemes will be compared for it. Methods are discussed to make simulations of the Jacobi process as accurate as possible, making sure it crosses its boundaries -1 and 1 as little as possible. It will be shown that a correlation swap can be hedged by dynamically trading variance dispersion trades. The main result of the thesis is a partial differential equation for the fair value of a correlation swap. It will be shown that the expression for the value of a correlation swap obtained by Bossu's model satisfies this partial differential equation.