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/Derivatives articles
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...
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...
Counterparty risk is difficult to include systematically in credit default swap pricing. Reviving Merton’s structural approach – and generalising to higher dimensions – makes it tractable. By Alex Lipton and Ioana Savescu
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. In the case of the so-called risk-free close-out,...
The asymptotic behaviour of local volatility surfaces for low and high strikes – the so-called wings – is important in option pricing and risk management. Stefano De Marco, Peter Friz and Stefan Gerhold show certain models allow for the derivation...
The classic approach to the benchmark interest rate options model leads to nonsensical negative probabilities at low strikes – but a new approach promises to fix the puzzle, and allow the pricing of negative-strike options. Laurie Carver introduces...
Using a one time-step finite difference implementation, Jesper Andreasen and Brian Huge eliminate the arbitrages in the wings of the volatility smile that result from most expansion techniques for local stochastic volatility models, including the widely...
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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