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Vega and Theta of an Interest Rate Derivative |
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PP: 1097-1105 |
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doi:10.18576/jsap/130319
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Author(s) |
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Adaobi Mmachukwu Udoye,
Chisara Peace Ogbogbo,
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Abstract |
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| Interest rate derivatives are important financial instruments whose values are influenced by movements in interest rates. A good risk manager has to price and compute sensitivities in order to evade unnecessary risks for the interest rate derivatives. In this paper, we derive expressions for the important greeks, namely, vega and Theta needed to determine how sensitive a derivative price is to changes in the volatility of its underlying interest rate and how the price changes as time to maturity draws near. This is achieved using integration by parts techniques of Malliavin calculus. The derived expressions will assist a risk manager in order to curtail risks.
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