Technical papers/Derivatives
Repricing the cross smile: an analytic joint density
Derivatives contracts on multiple foreign exchange rates must be priced to avoid arbitrage by contracts on the cross-rates. Given the triangle of smiles for two underlyings and their cross, Peter Austing...
In this paper, Dan Mahoney and Krzysztof Wolyniec show that in co-integrated (mean-reverting) futures markets, active dynamic hedging is required to realise the quadratic variation of the underlying spread...
Simon Cedervall and Vladimir Piterbarg develop a new vanilla model that directly links constant maturity swap (CMS) and payment convexity in general payouts to volatilities of swaptions of all relevant...
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More Technical papers/Derivatives articles
Hybrid correlation matrices
Integrating available implied volatility data into a historical correlation matrix is an essential part of calibrating a Monte Carlo credit value adjustment pricing simulation at the portfolio level, but can yield nonsensical results. Someshwar Roy and...
Perturbed Gaussian copula: introducing the skew effect in co-dependence...
Gaussian copula models are often used in the industry when single-asset information is quoted but little is known about their joint relation. These models may arise from correlated stochastic Brownian processes with deterministic volatility and correlation....
Being particular about calibration
Following previous work on the calibration of multi-factor local stochastic volatility models to market smiles, Julien Guyon and Pierre Henry-Labordère show how to calibrate exactly any such model. Their approach, based on McKean’s particle method,...
Funding cost adjustments for derivatives
A paper discussing the relationship of the funding cost adjustment to the balance sheet and demonstrating two ways in which the funding cost adjustment can be eliminated
In the balance
Funding costs and counterparty credit risk adjustments have become increasingly important contributions to the total value of derivatives positions. Based on a recently developed derivatives valuation framework that incorporates these two effects in a...
Filling the gaps
Calibrating a local volatility model to options prices is a complicated process requiring both interpolation of liquid prices and extrapolation beyond them. Recently focus has turned to efficient numerical methods. Here, Alex Lipton and Artur Sepp show...
Filling the gaps
Calibrating a local volatility model to options prices is a complicated process requiring both interpolation of liquid prices and extrapolation beyond them. Recently focus has turned to efficient numerical methods. Here, Alex Lipton and Artur Sepp show...
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