Callibration of implied volatilities for illiquid interest rate products in the Brazilian market

The project aims to address issues in the pricing of interest rate derivatives in an illiquid market. In particular, the project will examine the pricing of options on the Brazilian average interbank deposit rate index. A critical element in determining appropriate prices is the volatility implied by observable market prices. However, the lack of liquidity in these markets makes that problematic. The project will examine different methodologies for producing implied volatilities for use in a pricing model. For each methodology, the project will examine the reliability, efficacy, and potential risk and errors in doing so. A pricing methodology will have to be implemented and employed as part of the project work.

Faculty Supervisor:

Drs. David Lozinski & Matheus Grasselli

Student:

Guanyi Chad Lu

Partner:

RiskGrid Technologies Inc.

Discipline:

Mathematics

Sector:

Service industry

University:

McMaster University