Cutting Edge

Honour your contribution

What is the best method for determining the risk contribution of a component in a portfolio? An exploration of the pros and cons of three important methods, showing that none dominates the others.

Mean-reverting smiles

Commodity markets such as crude oil exhibit mean reversion as well as option smiles. The authors construct a model suitable for pricing exotic options in these markets

Exotic spectra

Eigenfunction expansions can also be applied to finance. The method is particularly suited to barrier and Asian options, with convergence properties that compare favourably with Monte Carlo.

Inside insider trading

Securities regulators need techniques to detect insider trading if it occurs and determine the extent of possible sanctions. Here, the author proposes a new probabilistic methodology particularly suited to illiquid markets.

New products, new risks

Structured equity products marketed in Europe present considerable risk management challenges. The author shows the danger of using naive model-based approaches to price and hedge them.

Analytical approach to credit risk modelling

The increasing popularity of VAR-based credit portfolio risk models has led to a growing recognition that Monte Carlo techniques are inadequate for economic capital calculations. Here, Michael Pykhtin and Ashish Dev present a new analytical alternative…

Himalaya options

Nothing epitomises the challenges of complex equity derivatives better than the so-called ‘mountain range’ products. In the second article looking at the challenges of this market, Marcus Overhaus analyses a particular product, the Himalayan option,…

Calibrating Libor

With a rich spectrum of maturities and tenors to contend with, the toughest aspect of pricing interest rate options is calibrating models of forward rates to market data. Here, Damiano Brigo and Fabio Mercurio present a scheme for simultaneously…

A discrete question

How should discrete dividend options be modelled in an equity option pricing framework? As Volf Frishling warns, unthinking use of certain models to solve this problem can lead tosignificant mispricing in some situations

Pricing default baskets

Nicholas Dunbar, Risk’s technical editor, introduces the first in a new series of technical papers written by quants at Deutsche Bank.“Default correlation has been one of the hottest topics in credit derivatives over the past year. So it is a pleasure to…

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