AN INTEREST RATE DERIVATIVE AND ITS SENSITIVITIES IN A SUBORDINATED LÉVY MARKET

AN INTEREST RATE DERIVATIVE AND ITS SENSITIVITIES

Abstract

Certain financial instruments such as interest rate derivatives experience jumps due to many factors.
Literature has shown that little has been done in considering occurrence of jumps in the interest rate market
and its sensitivity analysis. In order to avoid risk, an investor needs to understand the effects of changes
in the parameters of the interest rate derivatives to its output in a market with jumps; L\'{e}vy processes
have the ability to take care of such jumps. This work was designed to derive expression for interest rate
model driven by a subordinated L\'{e}vy process called a variance gamma process and the use of Malliavin
calculus to compute its greeks in order to determine its sensitivities to certain changes in its parameters.