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Credit Risks of Interest Rate Swaps: A Comparative Study of CIR and Monte Carlo Simulation Approach

  • Victor Fang
  • Vincent C. S. Lee
Part of the Lecture Notes in Computer Science book series (LNCS, volume 3177)

Abstract

This paper compares the credit risk profile for two types of model, the Monte Carlo model used in the existing literature, and the Cox, Ingersoll and Ross (CIR) model. Each of the profiles has a concave or hump-backed shape, reflecting the amortisation and diffusion effects. However, the CIR model generates significantly different results. In addition, we consider the sensitivity of these models of credit risk to initial interest rates, volatility, maturity, kappa and delta. The results show that the sensitivities vary across the models, and we explore the meaning of that variation.

Keywords

Credit risk profile Interest Rate Models Monte Carlo Method 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2004

Authors and Affiliations

  • Victor Fang
    • 1
  • Vincent C. S. Lee
    • 2
  1. 1.Department of Accounting and Finance, Faculty of Business and EconomicsMonash University 
  2. 2.School of Business Systems, Faculty of Information TechnologyMonash University 

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