This thesis presents an empirical study on valuation of OTC derivatives. The valuation of OTC derivatives is one of the most important issues that the finance industry must face in order to improve the OTC derivatives market in Korea. The main contents of this thesis is finding the theoretical price of two case derivatives products. These two case derivatives products show representative styles of OTC derivatives. One is an OTC derivatives product linked to LIBOR. The other is an OTC derivatives product linked to KOSPI200. To price the first product we use CIR(Cox, Ingersoll, and Ross) interest rate model to predict coupon rates, and the Hull and White model to estimate the credit risk of the issuer. To price the second product we use the continuous time stochastic process for stock prices to predict coupon rates, and the Jarrow and Turnball model to estimate the credit risk of the issuer.
The results show that in both case of two derivatives products, theoretical prices are a little lower than issue prices. The gap between the prices is customization cost. OTC derivatives products usually have very complicated structures, therefore understanding the characteristics of each product is a very important issue to understand in order to price a product.
