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Contribution Details
| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Fitting interest derivatives' volatility smile in negative interest landscape |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 64 |
| Date | 2020 |
| Abstract Text | In this thesis, I concentrate on negative interest rates and how they caused problems in pricing interest rate derivatives. In this regard, two forms of the market-standard SABR interest rate model are presented and examined both, theoretically and empirically. To this end, it is shown how these models can be applied in the Swiss market in order to price options such as caps and floors. This work includes the calibration process as well as a possible answer to how the optimal β parameter can be chosen. Furhtermore, an out of sample analysis is conducted, in which selected strikes were removed from the implied volatility smile. I conclude that the Normal SABR model outperforms the shifted Black SABR model under quantitative as well as qualitative viewpoints . |
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