The credit and liquidity crisis of 2007 has triggered a number of inconsistencies in the interest rate market, questioning some of the standard methods and assumptions used to price and hedge interest rate derivatives. It has been shown that using a single risk-free curve (constructed from market instruments referencing underlying rates of varying tenors) to forecast and discount cash flows is not theoretically correct. Standard market practice has evolved to a multi-curve approach, using different curves to forecast and discount cash flows. The risk-free discount curve is proxied by the Overnight-Indexed Swap (OIS) curve. In South Africa there is no liquid market for OIS. In this dissertation a method is developed to estimate the ZAR OIS curve. A cointegration relationship between the SAFEX Overnight Rate, and the 3-month JIBAR rate is shown to exist. This relationship is used in a dual bootstrap algorithm, to simultaneously estimate the ZAR OIS curve and 3-month JIBAR tenor curve, while maintaining arbitrage relationships. The tractability of this method is shown, by pricing options written on ZAR OIS.
Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:uct/oai:localhost:11427/25447 |
Date | January 2017 |
Creators | Sender, Nina Alexandra |
Contributors | Taylor, David |
Publisher | University of Cape Town, Faculty of Commerce, Division of Actuarial Science |
Source Sets | South African National ETD Portal |
Language | English |
Detected Language | English |
Type | Master Thesis, Masters, MPhil |
Format | application/pdf |
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