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8/8/2019 Valuation of IR Swap Models in India
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Empirical Evaluation of Basic Models
of Interest Rate Swaps in India
8/8/2019 Valuation of IR Swap Models in India
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Literature Review
There are many studies which deal with the
various models of the Interest Rate Swaps
The notable studies include Sun, Sundaresan
and Wangs (1993) findings, B.A Minton,PayalGhose etc
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Proceedings of the World Congress on
Engineering 2009 Vol II WCE 2009, July 1 - 3,
2009, London, U.K.: On the Determinants of
Interest Rate Swap Usage by Indian Banks
- Dr. B. Charumathi(2009)
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To model the factors which determine the use of
interest rate swap by bank to manage IRR.
To manage interest rate risk bank uses 2 approaches
On balance sheet adjustments GAP Analysis
Duration GAP Analysis
Off balance sheet adjustments Interest Rate Futures
Interest Rate Swaps
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Variables Chosen for study
Characteristics Proxy Variable
Size Logarithm Of Total Assets
Asset Quality (AQ1) Net Loans and Advances
Asset Quality (AQ2) Provision for NPA
Capitalisation (CAP) Net Worth
Interest Rate Risk (IRR) Net Interest Income
Return Performance (ROTA) Profit Before Taxes
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Regression Model
IRS= a + b ( LOGTA) + c (AQ1) + d (AQ2) + eCAP + f (IRR) + g (ROTA) + error
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Conclusion
Larger and Profitable banks do not seem to
have comparative advantage to use IRS for
hedging purpose than smaller banks.
Banks with High NW, High Loans to asset
Ratio, tends to be higher user of IRS.
May consider variables such as Board
Composition and Management Preferences
Scope of Future Research
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Reserve Bank of India Occasional Papers Vol.
31, No.1, Summer 2010
- SaurabhGhosh
and
AmarendraAcharya
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Variables considered for this study
1. One year G-sec yield
2. Five year G-sec yield
3. Call Market Rate
4. Repo Rate, Reverse Repo Rate and Cash Reserve Ratio
5. Call Money Spread
6. Weekly WPI Inflation Rate
Determinants of Overnight Indexed
Swaps(OIS) Rates
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Regression Model
OIS= a + b ( G1) + c (G5) + d (Call Market) + e
(Repo Rate) + f (CMS) + g (WPI) + error
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Conclusion
G-Sec rate has high and significant positivecorrelation.
Call Rate has positive and significantcorrelation with OIS rate
Inflation rate is not found to be correlated
Reasons for the OIS rate being lower than therisk free GOI bond rate
Scope of Future Research
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California Debt and Investment Advisory
Commission: Interest rate swap pricing
models
- Doug Skarr ( January 2007)
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Theoretical Model Used
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SIFMA Swap Rate (U.S Market)
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Author Year Area of Research Abstract Conclusions
D.KMalhotra 2006 Financial
Integration andthe Indian Swap
Market
Relationship
between two mainvariety of swap rates
in India(OIS and
MIFOR)
Arbitrage
considerationskeep the two
swap curves from
drifting too far
from each other.
B.A Minton Journal of
Finance 1997
Basic valuation
models for plainvanilla Interest
rate swaps
Test analogies
between swaps andreplicating portfolios
of bonds by
estimating interest
rate swap rates
Ten Year swap
Rates arepositively related
to ten year
corporate bond
yields
Vadhindran
K. Rao
1997 An Empirical
Examination Of
Interest Rate
Swap Market
Investigate the
presence of default
risk premium:
Compares the par
bond yield with swap
bid rate of Dealers
Spread between
Swap rates and
Treasury yields
generally increase
with an extension
in maturity of
swap contracts
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