Risk magazine - Volume16/No05

The smirking gorilla

Interest rates are the 800-pound gorilla of the derivatives industry. Thus, while the US Office of the Comptroller of the Currency reported that US commercial banks had a total credit derivatives notional exposure of $635 billion in the fourth quarter of…

The road to partition

Applying the ensemble approach developed in these pages last month, Kevin Thompson and Roland Ordovas calculate risk contributions and show how to measure higher-order default dependence using the method of partitions. The results provide tools allowing…

Real option valuation and equity markets

Many non-financial assets can be viewed as ‘real options’ linked to some underlying variable such as a commodity price. Here, Thomas Dawson and Jennifer Considine show that the stock price of a well-known electricity generating company is significantly…

Black smirks

Fei Zhou presents a simple stochastic volatility extension of the Black interest rate option pricing model widely used by traders. Using a perturbative expansion in volatility of volatility, he derives modified Black formulas that correctly fit the…

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