Technical papers/Equity Derivatives
Variance swaps and non-constant vega
Variance swaps have gained in popularity due to their ability to provide investors with purevolatility exposure – a fairly stable gamma exposure despite changes in the value of theunderlying. The vega...
In an article published in Risk in September 2004, Lorenzo Bergomi highlighted how traditionalstochastic volatility and jump/Lévy models impose structural constraints on the relationshipbetween the...
Vladimir Piterbarg derives ‘effective’ time-independent parameters for stochastic volatility models with time-dependent coefficients. These formulas facilitate efficient calibration of time-dependent...
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More Technical papers/Equity Derivatives articles
The sum of its parts
One can view a corporation’s individual projects as a portfolio of options – useful risk management tools to be used if their risk/return ratios are better than that of the firm as a whole. But how to work out the equity cost of capital at this disaggregated...
Smile dynamics
Traditionally, smile models have been assessed according to how well they fit market option prices across strikes and maturities. However, the pricing of most recent exotic structures, such as reverse cliquets or Napoleons, is more dependent on the assumptions...
Local cross-entropy
One way of addressing the inconsistency between exchange-traded options prices and the Black-Scholes model is to attempt to find alternative risk-neutral distributions that are more consistent. However, non-uniqueness means an additional criterion is...
Smile at the uncertainty
Smile-consistent alternatives to the Black-Scholes model are often too cumbersome to be used for large portfolios of exotic options. Damiano Brigo, Fabio Mercurio and Francesco Rapisarda propose an intuitive stochastic volatility model that is easy to...
An arbitrage-free interpolation of volatilities
Nabil Kahalé describes a new construction of an implied volatilities surface from a discrete set of implied volatilities that is arbitrage-free and satisfies some smoothness conditions. His method provides an excellent fit to the smile of the local volatilities...
Unifying volatility models
This article introduces a method for building analytically tractable option pricing models that combine state-dependent volatility, stochastic volatility and jumps. The eigenfunction expansion method is used to add jumps and stochastic volatility to hypergeometric...
Corridor variance swaps
This article studies a recent variation of a variance swap called a corridor variance swap (CVS). For this swap, returns are not counted in the realised variance calculation if the reference index level is outside some specified corridor. CVSs allow speculators...
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