Cutting Edge

Operational risk modelled analytically

Regulators require banks to use an internal model to compute a capital charge for operational risk, which is thought to be sensitive to assumptions on dependence between losses that still remain a matter of debate. Vivien Brunel proposes an analytical…

Optimal execution with a price limiter

Balancing the price uncertainty and price impact of large orders is an important issue for many market participants. While classical approaches lead to trading algorithms that are invariably price-path insensitive, in this article, Sebastian Jaimungal…

Why CDOs work

Collateralised debt obligations have largely gone under the radar since the 2007 financial meltdown, when their market collapsed. Nearly every attempt at explaining the cause of their failure pointed towards flawed assumptions in pricing models and…

Cutting Edge introduction: another FVA?

Including funding costs and benefits in derivatives prices is a controversial topic, closely tied up with the credit and debit valuation adjustments of counterparty risk. But new research suggests that, even with no default risk, differences in the…

Cutting Edge introduction: fixing FVA

The funding valuation adjustment (FVA) is the biggest controversy of recent times in quantitative finance. Now the authors of the original FVA paper are back – and think there may be a solution. Laurie Carver introduces this month’s technical articles

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