Technical papers/Derivatives
Expanded Smiles
Implementing models with stochastic volatility can be challenging. Here, Jesper Andreasen and Brian Huge describe an expansion approach for such models that avoids the high-dimensional partial differential...
Implementing models with stochastic as well as deterministic local volatility can be challenging. Here, Jesper Andreasen and Brian Huge describe an expansion approach for such models that avoids the high-dimensional...
Adjoint methods have recently been proposed as an efficient way to calculate risk through Monte Carlo simulation. Luca Capriotti and Mike Giles extend these ideas and show how adjoint algorithmic differentiation...
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More Technical papers/Derivatives articles
A dynamic model for correlation
Equity markets have experienced a significant increase in correlation during the crisis, resulting in exotic derivatives portfolios realising large losses. As larger correlations in downward scenarios are already implied in the index option market in...
Funding beyond discounting: collateral agreements and derivatives pricing...
Standard theory assumes traders can lend and borrow at a risk-free rate, ignoring the intricacies of the repo and collateralisation markets. Here, Vladimir Piterbarg shows that these force adjustments to discounting, forward prices and implied volatilities,...
Bilateral counterparty risk with application to CDSs
Previous research on credit valuation adjustments (CVAs) with correlation between underlying and counterparty default, including volatilities of both, assumed unilateral default risk. However, the crisis prompted counterparties to ask institutions to...
Individual names in top-down CDO pricing models
The Gaussian copula collapsed as a means of pricing collateralised debt obligations in the crisis of 2008, as to match prices and deltas nonsensical correlation parameters were required. By adapting the traditional framework to cater for more general...
Pricing and hedging basket credit derivatives in the Gaussian copula
The static assumptions of the Gaussian copula model have long presented an obstacle to dynamic hedging of credit portfolio tranches. Here, Jean-David Fermanian and Olivier Vigneron combine the copula with a spread diffusion to derive hedging error as...
Funding beyond discounting: collateral agreements and derivatives pricing...
Standard theory assumes traders can lend and borrow at a risk-free rate, ignoring the intricacies of the repo and collateralisation markets. Here, Vladimir Piterbarg shows that these force adjustments to discounting, forward prices and implied volatilities,...
Putting the smile back on the face of derivatives
Cross-asset quadratic Gaussian models have been limited in the scale of their implementation by the difficulty in ensuring the correct drift conditions to omit arbitrage. Here, Paul McCloud shows how to exploit the symmetries of the functional form to...
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