Technical papers/Derivatives
Post-shock short-rate pricing
The basis between swaps referencing funded fixings and swaps referencing overnight collateralised fixings has increased in importance with the 2007–09 liquidity and credit crises. This basis means that...
Local jump intensity models, in which the volatility of a Lévy process is made spot-dependent, are difficult to parameterise and calculate. However, they are an important ingredient of credit barrier...
The financial crisis multiplied the yield curves used to price interest rate derivatives, making traditional no arbitrage pricing no longer valid. By taking into account the basis adjustment bootstrapped...
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More Technical papers/Derivatives articles
Breaking correlation breaks
Large deviations in dependencies – correlation breaks – are a hazard when risk managing multi-asset derivatives such as worst-of options. Adil Reghai presents a calibration scheme for local correlation that ensures a basket’s skew is compatible...
Two curves, one price
The financial crisis multiplied the yield curves used to price interest rate derivatives, making traditional no arbitrage pricing no longer valid. By taking into account the basis adjustment bootstrapped from market basis swaps and using a foreign currency...
Two curves, one price
The financial crisis has multiplied the yield curves used to price plain vanilla interest rate derivatives, making classic single-curve no-arbitrage relations and pricing formulas no longer valid. Marco Bianchetti shows that no-arbitrage can be recovered...
Smooth calibration of Markov functional models for pricing exotic interest...
The Libor market model is widely used but often criticised for its slowness. Nick Denson and Mark Joshi develop an accurate and stable calibration procedure that allows for the effective use of a control variate
Pricing distressed CDOs with base correlation and stochastic recovery...
In 2008 and 2009, the calibration of the standard Gaussian copula model for collateralised debt obligations has frequently broken down. To overcome that problem, Martin Krekel has embedded the model with correlated stochastic recovery rates. He shows...
A bottom-up model with top-down dynamics
Yadong Li proposes a flexible, tractable and arbitrage-free bottom-up dynamic correlation modelling framework with a consistent stochastic recovery specification for multi-name credit derivatives. In this framework, the model’s spread dynamics can be...
The value of a variance swap – a question of interest
Pricing equity variance swaps is well understood in the case of deterministic interest rates, but particularly for longer-dated swaps the stochastic nature of the rate cannot be ignored. Here, Per Hörfelt and Olaf Torné derive the fair strike when both...
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