The Pricing Analysis Of Range Accrual Interest Rate Derivative Based On The LIBOR Market Model

Many interest rate models are deduced to price the interest ratederivatives and products. In China, most interest rate derivatives areembedded into the other products and most of them could not be priced inthe close-form solution under the complex structure. The LIBOR marketmodel which is applied broadly in practice for its completeness system andmore closeness to the reality is used in pricing the path-dependentderivative products and will be introduced in details in the thesis.This thesis also introduces the pricing process of the range accrualinterest rate derivatives issued by HSBC Bank in the LIBOR marketmodel.The process to pricing the product includes the initial establishment ofthe yield curve with the term structure of the swaps in the market, thecalibration of the forward rates volatilities, the Monte Carlo simulation viaLIBOR market model and simulation of the deposit rate path. The initialforward rates can be generated under the techniques of bootstrapping andcubic spline and the parameters can be calibrated under the swap data.The comparison between the theoretical values and the market valuein the market illustrates the adaptability of the LIBOR market model.Then, we design a dual-range accrual derivative which is linked to theSHIBOR and IRS and pricing it using the LIBOR market model.All in all, the paper shows that the LIBOR market model and MonteCarlo simulation is a good tool for pricing the range accrual interest ratederivatives.