Technical papers
Bilateral CVA of optional early termination clauses
The value of early termination clauses in derivatives depends crucially on the type of close-out value used and on the counterparty risk, and embeds optionality in even the most vanilla swap contracts....
Casual assumptions can be seductive – but wrong. An examination of what is sometimes taken for granted can yield surprising results, as a new article on collateral currency shows. Laurie Carver introduces...
The crisis abolished the risk-free rate, and brought the role of credit support annexes to the fore in derivatives pricing. Paul McCloud develops the general pricing framework that allows the convexity...
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How banks needs to consider their IT infrastructure
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More Technical papers articles
Applied risk management series: Venturing beyond VAR
In this article, Carlos Blanco and José Ramón Aragonés review the historical simulation methodology used to estimate value-at-risk and expected tail loss, while including adjustments to traditional assumptions that can help improve risk forecasts for...
LPI swaps with a smile
Inflation models tend to be poor at capturing the high sensitivity of Limited Price Index (LPI) swap payoffs to year-on-year smiles and correlations, and consequently miss market quotes. Yann Ticot and Xavier Charvet propose a simple framework for pricing...
Defined benefit pension strategy with stochastic volatility
A crucial question in the investment strategy for a defined benefit pension fund is how this strategy will influence the time evolution of the funding level, i.e. the ratio of assets divided by liabilities. Most pension funds split their investment portfolio...
Cutting Edge introduction: CVA for CDSs
Counterparty risk is generally thought of at a portfolio level, but understanding how a particular payout interacts with credit and debit valuation adjustments could help banks make business decisions. Laurie Carver introduces this month’s technical...
Wrong-way risk, credit and funding
The risk of exposure and counterparty default probability both increasing – so-called wrong-way risk – is usually understood in terms of the correlation between the two variables. But this approach focuses more on the centre of the distribution. This...
Variance and volatility swaps in energy markets
This paper focuses on the pricing of variance and volatility swaps in the energy market. An explicit variance swap formula and a closed-form volatility swap formula (using the Brockhaus-Long approximation) for energy assets with stochastic volatility...
Quantifying natural gas storage optionality: a two-factor tree model
We quantify the optionality in US natural gas storage leases under a model of optimal storage management. The model utilizes a two-factor tree in which both factors mean-revert; it calibrates to current market conditions, accounts for volume constraints...
Using market and credit risk analytics to strengthen performance
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This handy guide reviews the various steps banks are taking to improve their risk management techniques, looking at the benefits and pitfalls of each one.
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Using market and credit risk analytics to strengthen performance
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