Technical papers/Equity Derivatives
What’s a basket worth?
Peter Laurence and Tai-Ho Wang take a significant step in the valuation of basket options with positive and fixed weights. These model all index options, price, cap or equal weighted. Departing from the...
Since the discovery that traditional calibration methods fail to capture the dynamics of the smile, new approaches based on mixtures or ensembles of models have been developed. Simon Johnson and Han Lee...
Risk management approaches that do not incorporate randomly changing volatility tend to under- or overestimate the risk, depending on current market conditions. We show how some popular stochastic volatility...
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More Technical papers/Equity Derivatives articles
Reconstructing volatility
Options on stock baskets have become a mainstay of the equity derivatives business, but pricing and hedging of such products is highly sensitive to implied volatility and correlation assumptions. Here, Marco Avellaneda, Dash Boyer-Olson, Jérôme Busca...
Reconstructing volatility
Options on stock baskets have become a mainstay of the equity derivatives business, but pricing and hedging of such products is highly sensitive to implied volatility and correlation assumptions. Here, Marco Avellaneda, Dash Boyer-Olson, Jérôme Busca...
Finessing fixed dividends
How should one account for fixed cash dividends in equity option pricing? As recently discussed in these pages, there are a variety of possible approaches. Here, Michael Bos and Stephen Vandermark present a variant of the stock price adjustment approximation...
Trees from history
Volatility smile models and their variants are the preferred pricing method for dealers working within the risk-neutral world. However, such models use option prices as input parameters, making them less useful for assessing fair value. Risk-neutralised...
On the log-log linearity of the size distribution of growth stocks
Mauboussin & Schay (2000)1 discovered an almost linear relationship between the logarithm of the market capitalisation and the logarithm of the rank for growth stocks. Kou & Kou (2001)2 proposed an explanation for this observation based on the theory...
Unified Asian pricing
The evergreen problem of pricing Asian options has traditionally led to solutions of great analytical or computational complexity. Recently, the solutions have become much simpler, as Jan Vecer demonstrates with a new one-dimensional PDE formulation....
Substitute hedging
Derivatives on assets that are difficult to trade are of growing importance. Pricing suchderivatives requires the use of utility theory and proxy assets for hedging. Here, VickyHenderson and David Hobson review the theory and discuss several topical examples...
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