The market value and dynamic interest rate risk of swaps

Abstract

At the time of initiation, interest rate swaps are of zero market value to the counterparties involved. However, as time passes, the market value of the swap position of counterparty may become positive or negative. In this paper, we examine the market values and dynamic interest rate risks of existing swap positions using the one factor general equilibrium term structure model of Cox, Ingersoll and Ross (1985). The valuation and risk measurement framework of this paper should be useful in developing a value cum risk accounting method advocated by Merton and Bodie (1995) for better internal management and reporting purposes and for more effective regulation.

Citation

Chen, A.H. and Chaudhury, M.M. (2002), "The market value and dynamic interest rate risk of swaps", Research in Finance (Research in Finance, Vol. 19), Emerald Group Publishing Limited, Leeds, pp. 199-239. https://doi.org/10.1016/S0196-3821(02)19010-1