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...
Banks are increasingly using their IT infrastructure to increase their competitive advantage. Learn how this can work in practice.
More Technical papers articles
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...
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...
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...
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...
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...
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...
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...
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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