Quantitative analysis
Variance swaps under no conditions
Conditional variance swaps are claims on realised variance that is accumulated when the underlying asset price stays within a certain range. Being highly sensitive to movements in both asset price and its variance, they require a very reliable model for…
Valuing inflation futures contracts
In recent years, futures contracts written on inflation (specifically, on the ratio of the consumer price index (CPI) level at two different times) have been introduced. Working within the Jarrow & Yildirim (2003) model, John Crosby derives formulas for…
The intrinsic currency valuation framework
Introducing the concept of the intrinsic value of a currency, Paul Doust shows how to use foreign exchange market volatilities to calculate the volatilities of intrinsic currency values and the correlations between them
Default and recovery correlations - a dynamic econometric approach
Integrating coherences between defaults and loss given default (LGD) is postulated by Basel II. If there is a positive correlation between the two, separate models for each lead to biased estimates for the LGD parameters, and the economic loss is…
Replicating embedded options
Cutting edge embedded options
When did the JGB market become efficient?
Focusing on the deviation from the fair-yield curve, Koichi Miyazaki and Satoshi Nomura discuss the transition in efficiency observed in the Japanese government bond market and find out that the turning point was in 1996, when the Japanese repo market…
Shortfall: a tail of two parts
Richard Martin and Dirk Tasche show that the expected shortfall, when used in the conditional independence framework, has an elegant decomposition into systematic (risk-factor-driven) and unsystematic parts. The theory is compared and contrasted with the…
Embedded Options - Building bridges
Technical papers
Default and recovery correlations - a dynamic econometric approach
Integrating coherences between defaults and loss given default (LGD) is postulated by Basel II. If there is a positive correlation between the two, separate models for each lead to biased estimates for the LGD parameters, and the economic loss is…
The vanna-volga method for implied volatilities
Option pricing
A matter of attitude
Technical papers
Landesbank BW
Quant Analysis
Bayerische Landesbank
Quant Analysis
Credit Mutuel
Quant Analysis
Natwest International
Quant Analysis
Managing interest rate risk for non-maturity deposits
For many banks, non-maturity deposits represent a significant part of funding. However, there is still no commonly accepted approach to managing such deposits' interest rate risk. Marije Elkenbracht and Bert-Jan Nauta introduce two dynamic hedge…
Operational VAR: meaningful means
Making the assumption that the distribution of operational loss severity has finite mean, Klaus Böcker and Jacob Sprittulla suggest a refined version of the analytical operational value-at-risk theorem derived in Böcker & Klüppelberg (2005), which…
The saddlepoint method and portfolio optionalities
Richard Martin describes the application of saddlepoint methods to the calculation of tranche payouts and expected shortfall in loss distributions. Aside from computational use in their own right, the resulting formulas motivate a forthcoming discussion…
Maximum draw-down and directional trading
Maximum draw-down measures the worst drop in a market in a given time period. Jan Vecer shows how to price and replicate this event. Replication can be naturally linked to existing popular trading strategies, such as momentum or contrarian trading
Understanding longevity bonds
Cutting edge: longevity bonds
Van Lanschot Bankiers
Quant Analysis
KBC Bank/CBC Banque
Quant Analysis
Britannia International
Quant Analysis
EverBank
Quant Analysis