Cutting Edge
FVA accounting, risk management and collateral trading
Albanese, Andersen and Iabichino present a method for accounting and risk managing FVAs
Cutting edge: Kriging smooth energy futures curves
Applying kriging to extract smooth curves from energy futures prices
Pricing and hedging variance swaps on a swap rate
A pricing tool for fixed-income volatility products is introduced
Backward induction for future values
A new framework for derivatives pricing with valuation adjustments
Robust valuation and hedging of tolling agreements and physical assets
Flexible, martingale duality-based method provides reliable valuation
KVA: capital valuation adjustment by replication
KVA are introduced to take into account the effect of capital on funding
Back-testing expected shortfall
Three easy-to-implement methods for back-testing expected shortfall
Commodity leveraged ETFs: Tracking errors, volatility decay and trading strategies
Tracking performance of ETFs is examined, with a focus on volatility decay
Quant ideas: Liquidity in commodity risk management
Liquidity plays a vastly underappreciated role in commodity markets
Cutting edge intro: Righting wrong-way risk
Models that describe wrong-way risk should move away from simplistic copula models, critics say.
Heston model: shifting on the volatility surface
Stochastic volatility model combining Heston vol model and CIR++
Path-consistent wrong-way risk
A copula-based model for wrong way risk
Cutting edge intro: history in the modelling
Bloomberg quant Guyon delivers an alternative to stochastic local volatility
Short-rate joint-measure models
A joint-measure model combining Q-measure and P-measure
Path-dependent volatility
Julien Guyon on path-dependent volatility models
Credit exposure models backtesting for Basel III
The Basel Committee on Banking Supervision has introduced strict regulatory guidance on how to validate and backtest internal model methods for credit exposure. Fabrizio Anfuso, Dimitrios Karyampas and Andreas Nawroth incorporate these guidelines into a…
Regulatory costs break risk neutrality
Regulations impose idiosyncratic capital and funding costs for holding derivatives. Idiosyncratic costs mean that no single measure makes derivatives martingales for all market participants. Chris Kenyon and Andrew Green demonstrate that regulatory…
Cutting edge: Incorporating forex volatility into commodity spread option pricing
Spread option pricing: importance of forex risk factors illustrated
Cutting Edge intro: maths versus machine
Banks can use maths - rather than special chips - to boost computing speed
Optimal trading under proportional transaction costs
The theory of optimal trading under proportional transaction costs has been considered from a variety of perspectives. In this paper, Richard Martin shows that all results can be interpreted using a universal law through trading algorithm design
Adjoint credit risk management
Adjoint algorithmic differentiation is one of the principal innovations in risk management in recent times. Luca Capriotti and Jacky Lee show how this technique can be used to compute real-time risk for credit products, even those valued with fast semi…
Cutting Edge introduction: The trouble with algorithmic execution
New set-up allows fast, tractable optimisation of trade execution, without neglecting downside risk
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…