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Multi-curve bootstrapping and implied discounting curves in illiquid markets

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.

Identiferoai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:uct/oai:localhost:11427/25447
Date January 2017
CreatorsSender, Nina Alexandra
ContributorsTaylor, David
PublisherUniversity of Cape Town, Faculty of Commerce, Division of Actuarial Science
Source SetsSouth African National ETD Portal
LanguageEnglish
Detected LanguageEnglish
TypeMaster Thesis, Masters, MPhil
Formatapplication/pdf

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