The Research On The Pricing Model For Interest Rate Swap In Chinese Financial Market

This research mainly aims at current development of interest swap market in China and a newly improved pricing model is established in the end. Up to 2014, the total amount of interest swap in China hits 4000 billion Yuan, and by further analysis of basic different interests, those short-term interest rates like Shibor 1w, shibor 2w and FR007 are the top three rates applied in practice. And benchmark interest rate selection and risk premium are the main issues we should take into consideration for swap pricing in China.In this paper, we will assume that the value of a company is a geometric Brownian motion and we introduce risk premium to evaluate the default probability. After that, we will include the default probability into the non-arbitrage model which finally will give us a better estimation for risk premium. China should still hasten the marketization process of interest rate and encourage more companies take part in the interest swap market so that the pricing model could be more precise.