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...
Since the pioneering work of Dupire, the local volatility function can be derived from the implied volatility surface. Calculating implied volatilities from local volatilities is classically done by numerically...
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.
More Technical papers/Derivatives articles
Alexandre Antonov and Michael Spector present an analytical approximation of zero-coupon bonds and swaption prices for general short-rate models. The approximation is based on regular and singular expansions with respect to low volatility and contains...
Kirk Buckley, Sascha Wilkens and Vladimir Chorniy present a semi-analytical approach for calculating the counterparty exposure of credit derivatives contracts conditional on the default of the counterparty, based on a Merton-type asset return model. The...
Brody, Crosby & Li (2008) introduced a quasi-analytical method to price limited price index (LPI) swaps with the Jarrow & Yildirim (2003) model. Their method works well for short-term contracts, but the approximation error for long maturities may be far...
Developing an arbitrage-free, consistent volatility surface in both expiry and strike from a discrete set of option quotes is a difficult and computationally intense problem. In this article, Jesper Andreasen and Brian Huge use a non-standard variant...
Standard techniques for incorporating liquidity costs into the fair value of derivatives produce counter-intuitive results when the credit risk of the counterparty and the investor are added to the picture. Here, Massimo Morini and Andrea Prampolini show...
Collateral agreements are becoming popular in the over-the-counter derivatives market. Masaaki Fujii and Akihiko Takahashi demonstrate its significant impact on derivatives pricing with a direct link to the cross-currency market. The importance of embedded...
A dislocation between options on constant maturity swap rates and spreads in 2009 led to a static arbitrage opportunity. Here, Paul McCloud shows how this can be detected, and how a copula-based model strategy can exploit it
Technology can provide a competitive advantage in banking. How it is applied by Tier 1 and Tier 2 institutions, to the benefit for their risk management systems, is discussed.
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