This dissertation investigates the cost of using single-factor models to exercise and hedge American options on South African coupon bearing bonds, when the simulated market term structure is driven by a two-factor model. Even if the single factor models are re-calibrated on a daily basis to the term structure, we find that the exercise and hedge strategies can be suboptimal and incur large losses. There is a vast body of research suggesting that real market term structures are in actual fact driven by multiple factors, so suboptimal losses can be largely reduced by simply employing a well-specified multi-factor model.
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:uct/oai:localhost:11427/20532 |
| Date | January 2016 |
| Creators | Welihockyj, Alexander |
| Contributors | Silverman, Searle, McWalter, Thomas |
| 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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