Markedsværdi og modpartsrisiko på en valutaoption: En undersøgelse af model og inputparametres indflydelse på markedsværdien af en valutaoption med fokus på modpartsrisiko

Mads Bille

Student thesis: Master thesis


This thesis seeks to illuminate how the marketvalue is affected by the choice of pricing model as well as the input parameters. The goal is to describe how the marketvalue of a specific currency option can be estimated differently by counterparties as a result of diverging methods of pricing or differences in the marketdata. Following a brief theoretical walkthrough, covering basic theory on options, term structure of interest and risk management of credit and counterparty risk, the thesis includes an empirical analysis. The empirical analysis is based on an actual structured swap used to hedge a structured note issued on the Danish Exchange. After a description of the product as well as the required market data, the analysis seeks to shed light on the research question by estimating the market value through two different models and a sensitivity analysis. Initially a Garman-Kohlhagen model is employed, where it is found that a source of imprecision is inherent in the underlying assumptions of a constant term structure and volatility.The sensitivity analysis shows that the market value is affected by both change in interest rates and volatility, feeding the argument that the model does not capture the real world very well. Following this a Vasicek-based model is used to include interest rates as stochastic variables. It is found that this model, although more cumbersome and requiring additional market data, does not constitute an improvement in our pricing. Here it also found that the marketvalue is responsive to changes in the FX volatility leading to the conclusion that this is the greatest source of pricing discrepancies. The calculated marketvalues are juxtaposed with a counterparty valuation, which identifies rather large differences in the market value. This is discussed with emphasis on the counterpartyrisk, where it is argued, that there lies a cost connected with mispricing, be it either over- or undervaluing the true marketvalue. If undervalued, the true pre-settlement risk is underestimated, which could carry an unfortunate position should the counterparty fall into difficult circumstances. If overvaluing the true marketvalue, there is a possibility that the additional risk might be attempted hedged on a faulty basis.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2011
Number of pages102