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Interest Rate Swap Valuation in the Chinese Market

In: Innovations in Insurance, Risk- and Asset Management

Author

Listed:
  • Wei Cui
  • Min Dai
  • Steven Kou
  • Yaquan Zhang
  • Chengxi Zhang
  • Xianhao Zhu

Abstract

Following the 2008 financial crisis, the dual curve discounting method became widely used in valuing interest rate swaps denominated in major currencies, which implies the market consensus of accepting Overnight Indexed Swap rates as new proxies of risk-free rates. However, in the Chinese market, the outdated single curve discounting method is still widely used, because there is no consensus on the choice of the risk-free rate proxy. We apply the dual curve discounting method to the Chinese interest rate swap market and recommend using the 7-day fixing repo rate, a benchmark interest rate of the Chinese repo market, as the risk-free rate. Empirically, using the single curve discounting method may significantly undervalue a swap contract to the fixed rate receiver.

Suggested Citation

  • Wei Cui & Min Dai & Steven Kou & Yaquan Zhang & Chengxi Zhang & Xianhao Zhu, 2018. "Interest Rate Swap Valuation in the Chinese Market," World Scientific Book Chapters, in: Kathrin Glau & Daniël Linders & Aleksey Min & Matthias Scherer & Lorenz Schneider & Rudi Zagst (ed.), Innovations in Insurance, Risk- and Asset Management, chapter 13, pages 349-365, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789813272569_0013
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    Cited by:

    1. Brown, Patrick R. & O’Sullivan, Francis M., 2019. "Shaping photovoltaic array output to align with changing wholesale electricity price profiles," Applied Energy, Elsevier, vol. 256(C).

    More about this item

    Keywords

    Insurance; Actuarial Science; Risk Measure; Reinsurance; Copula; Replicating Portfolio; Bayesian Finance; Risk Classification; Stochastic Dominance; Dynamic Hedging; Autoregressive Hidden Markov Models; Exchange-Traded Funds; Uncertainty Quantification; Fixed Income; Stochastic Processes for Finance;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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