Risk magazine/Technical paper
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Opciones Sobre Diferenciales de CMS
Commodity options optimised
In 2005, John Crosby introduced a very flexible framework in which it is possible to price derivatives, including exotics, on almost any underlying commodity. In this article, he shows how pricing can be done approximately 30 to 400 times faster than the…
Weighted Monte Carlo
Most pricing models assume an asset behaviour and calibrate its parameters to fit the market. Weighted Monte Carlo is able to calibrate the market without making specific assumptions about the asset behaviour. When only vanilla products are considered,…
Smiling hybrids
Vladimir Piterbarg develops a multi-currency model with foreign exchange skew suitable for valuation and risk management of forex-linked hybrids, in particular power-reverse dual-currency (PRDC) swaps. The emphasis of the article is on model calibration…
A structural approach to EDS pricing
Structural credit models have been used to price bothcredit and equity derivatives, making them a naturalframework to price equity default swaps. Using such aframework, Elena Medova and Robert Smith derivean analytic expression for the EDS spread,…
Wrong way risk modelling
Beyond its potential impact on counterparty risk exposure, the wrong way risk arising in some derivatives transactions raises important modelling challenges. Christian Redon presents two suitable models based on conditional expected exposure. Among…
A practical operational risk scenario analysis quantification
Thomas Alderweireld, João Garcia and Luc Léonard define an operational risk scenario analysis and its quantification technique, leading to the determination of the loss distribution characteristics. The method is based on simple questions put to…
An empirical analysis of equity default swaps (II): multivariate insights
Equity default swaps (EDSs) have attracted much attention recently because of their similarities to credit default swaps on the one hand and American-style digital puts on the other. Particular interest has focused on collateralised debt obligations…
Smoking adjoints: fast Monte Carlo Greeks
Monte Carlo calculation of price sensitivities for hedging is often very time-consuming. Michael Giles and Paul Glasserman develop an adjoint method to accelerate the calculation. The method is particularly effective in estimating sensitivities to a…
An empirical analysis of equity default swaps (I): univariate insights
Arnaud de Servigny and Norbert Jobst assess whether standard quantitative credit techniques can be used to measure the individual risk of hybrid instruments called equity default swaps (EDSs). This endeavour is based on extensive empirical work. The…
Operational VAR: a closed-form approximation
Klaus Böcker and Claudia Klüppelberg investigate a simple loss distribution model for operational risk. They show that, when loss data is heavy-tailed (which in practice it is), a simple closed-form approximation for operational VAR can be obtained. They…
Trading down the slopes
The credit derivatives market is growing at an impressive rate, with the credit default swap (CDS) being the most popular instrument. This article is relevant for the trading of CDSs and bond portfolios. Mascia Bedendo, Lara Cathcart, Lina El-Jahel and…
An economic capital approach for hedge fund structured products
Hedge fund structured products are increasingly favoured by investors. Banks have been swiftly developing their commercial offers to meet this demand. However, the theoretical framework for the risk management of these products remains little explored,…
Unbiased risk-neutral loss distributions
Luigi Vacca introduces entropy maximisation (ME) to derive portfolio loss probabilities that are consistent with standard tranche prices on a credit default swap index. Tranche prices that are calculated using ME are free of arbitrage. A numerical…
Variance swaps and non-constant vega
Variance swaps have gained in popularity due to their ability to provide investors with purevolatility exposure – a fairly stable gamma exposure despite changes in the value of theunderlying. The vega exposure of this product, however, varies linearly…
Time for multi-period capital models
Several financial institutions use single-period models to determine their credit portfolio lossdistribution, calculate their loss volatility and assign economic capital. Here, Kevin Thompson,Alistair McLeod, Panayiotis Teklos and Shobhit Gupta…
Smile dynamics II
In an article published in Risk in September 2004, Lorenzo Bergomi highlighted how traditionalstochastic volatility and jump/Lévy models impose structural constraints on the relationshipbetween the forward skew, the spot/volatility correlation and the…
A fully lognormal Libor market model
In the Gaussian Heath-Jarrow-Morton model, all discount factors are lognormal under allforward measures. The Libor market model does not have this property – only the relevantforward Libor rate is lognormal under a given forward measure. However, all…
A Merton approach to transfer risk
Transfer risk is the risk that debtors in a country are unable to ensure timely payments of foreign currency debt service due to transfer or exchange restrictions, or a general lack of foreign currency. Although this risk is not extensively addressed in…
Co-monotonic default quote paths for basket evaluation
Cutting edge: Credit portfolio risk
Thinking positively
Cutting edge: Low default portfolios
Not a stock answer
Cutting edge: Low default portfolios
Hybrid equity-credit modelling
Cutting edge: Hybrid models
The two-factor Black-Litterman model
Over the years, an increasing number of practitioners have been using the Black-Littermanmodel to make tactical asset allocation decisions. The model generates more stable resultsthan classical mean-variance optimisation and incorporates return forecasts…