Pricing of a European Call Option Under a Local Volatility Interbank Offered Rate Model
American Journal of Theoretical and Applied Statistics
Volume 7, Issue 2, March 2018, Pages: 80-84
Received: Feb. 1, 2018; Accepted: Feb. 24, 2018; Published: Mar. 22, 2018
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Authors
Winnie Mbusiro Chacha, Pan African University, Institute of Basic Sciences, Nairobi, Kenya
Caroline Njenga, Pan African University, Institute of Basic Sciences, Nairobi, Kenya
Wilson Mahera, Pan African University, Institute of Basic Sciences, Nairobi, Kenya
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Abstract
This research seeks to give insight on how advances in developed money markets can be reflected towards the establishment of derivatives markets in under developed and developing financial markets. The dynamics of the London interbank offered rate, for the developed financial market and the Kenyan interbank offered rate, for the developing financial markets, are compared. For the period between 2013-2015, both interest rates are found to have the same underlying dynamics. A European caplet is priced using the local volatility interbank offered rate model. The local volatility model is used as it captures the volatility smiles more efficiently in one sweep. Thereafter, the local volatility interbank offered rate model is formulated and used to price the European caplet for the developing markets.
Keywords
Call Option, Kenyan IBOR, LIBOR
To cite this article
Winnie Mbusiro Chacha, Caroline Njenga, Wilson Mahera, Pricing of a European Call Option Under a Local Volatility Interbank Offered Rate Model, American Journal of Theoretical and Applied Statistics. Vol. 7, No. 2, 2018, pp. 80-84. doi: 10.11648/j.ajtas.20180702.14
Copyright
Copyright © 2018 Authors retain the copyright of this article.
This article is an open access article distributed under the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
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