Technical paper
Long or short in CDOs
Masterclass with Deutsche Bank
Extreme events and default baskets
Credit derivatives
Unified Asian pricing
Options
Testing assumptions
In calculating value-at-risk forecasts for trading portfolios, distributional assumptions are asimportant as the choice of risk factors, but it is not easy to determine the source of errorwhen rejected forecasts occur. Here, Jeremy Berkowitz develops a…
Substitute hedging
Derivatives on assets that are difficult to trade are of growing importance. Pricing suchderivatives requires the use of utility theory and proxy assets for hedging. Here, VickyHenderson and David Hobson review the theory and discuss several topical…
Universal Barriers
As our survey in this issue shows, there is an increasing volume of barrier products traded in the forex options market. Here, Alexander Lipton and William McGhee discuss the pricing of barriers under various model frameworks, with particular focus on…
Credit risk in asset securitisations: an analytical model
How much capital should banks reserve against investments in portfolio securitisations? Asserting that recent proposals on this subject by Basel are inconsistent, Michael Pykhtin and Ashish Dev propose a new analytical model suitable for tranches of…
At the end of the tail
When fat tails are present, extreme value theory provides a framework for estimating value-at-risk at higher confidence levels with greater accuracy than traditional Var methods. Naveen Andrews and Mark Thomas explain
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.
Globalisation and equity index exposure
Equity diversification