Economics - Theses

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Pricing long-dated equity derivatives under stochastic interest rates

Ranasinghe, Navin ( 2017)

Although the effect of interest rate stochasticity can safely be ignored for short-dated exchange traded derivatives, this is not the case for the kind of long-dated over-the-counter derivatives often used by insurance companies, fund managers, and other financial institutions. We therefore extend existing derivatives pricing techniques, specifically local volatility, stochastic volatility, and model-free pricing, to the case of non-deterministic interest rates. We also present empirical examples to highlight the potentially significant effect on long-term contracts.