By combining qualitative and quantitative data, Bayesian networks offer the perfect solution to the compelling need for an integrated approach to operational risk management, say Martin Neil and Ed Tranham.
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...
Commodity markets exhibit multi-factor behaviour as well as mean reversion. Building upon their previous paper, David Beaglehole and Alain Chebanier conclude the current Masterclass series by developing a two-factor mean-reverting model for crude oil...
Commodity markets such as crude oil exhibit mean reversion as well as option smiles. David Beaglehole and Alain Chebanier meet this challenge, constructing a model suitable for pricing exotic options in these markets
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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
As our survey in this issue shows, there is an increasing volume of barrier products traded in the forex options market. Here, Alexander Lipton and William McGhee discuss the pricing of barriers under various model frameworks, with particular focus on...
How much capital should banks reserve against investments in portfolio securitisations? Asserting that recent proposals on this subject by Basel are inconsistent, Michael Pykhtin and Ashish Dev propose a new analytical model suitable for tranches of large...
Commodity markets such as crude oil exhibit mean reversion as well as option smiles. The authors construct a model suitable for pricing exotic options in these markets
Eigenfunction expansions can also be applied to finance. The method is particularly suited to barrier and Asian options, with convergence properties that compare favourably with Monte Carlo.
Structured equity products marketed in Europe present considerable risk management challenges. The author shows the danger of using naive model-based approaches to price and hedge them.
Does the global presence of large multinational companies diminish the diversification effect inequity portfolios? Gary Robinson argues that this is indeed the case, and suggests a remedy
The increasing popularity of VAR-based credit portfolio risk models has led to a growing recognition that Monte Carlo techniques are inadequate for economic capital calculations. Here, Michael Pykhtin and Ashish Dev present a new analytical alternative...
Nothing epitomises the challenges of complex equity derivatives better than the so-called ‘mountain range’ products. In the second article looking at the challenges of this market, Marcus Overhaus analyses a particular product, the Himalayan option,...
In response to the above article, the authors argue that pure firm-value approaches to default prediction are fundamentally flawed.?
The author examines a wide range of volatility smile models in the context of the liquidity of the forex options markets
Do default indicators such as agency ratings improve upon the predictive power of KMV’s proprietary default prediction methodology?
With a rich spectrum of maturities and tenors to contend with, the toughest aspect of pricing interest rate options is calibrating models of forward rates to market data. Here, Damiano Brigo and Fabio Mercurio present a scheme for simultaneously calibrating...
How should discrete dividend options be modelled in an equity option pricing framework? As Volf Frishling warns, unthinking use of certain models to solve this problem can lead tosignificant mispricing in some situations