Technical paper/Derivatives pricing
Polynomial upper and lower bounds for financial derivative price functions under regime-switching
In this paper, the authors present a new approach to bounding financial derivative prices in regime-switching market models from both above and below.
Bounding Bermudans
Thomas Roos derives model-independent bounds for amortising and accreting Bermudan swaptions
Derivatives funding, netting and accounting
Christoph Burgard and Mats Kjaer expand their semi-replication framework to multiple counterparties
Gap risk KVA and repo pricing
Wujiang Lou introduces a reserve capital approach to the hedging error in the BSM model
Deriving derivatives
Andrei Soklakov shows how to incorporate traditional investment ideas and clients’ views into structured product design
Accelerated trinomial trees applied to American basket options and American options under the Bates model
This paper introduces accelerated trinomial trees, a novel efficient lattice method for the numerical pricing of derivative securities.
Numerical valuation of derivatives in high-dimensional settings via partial differential equation expansions
This paper presents a new numerical approach to solving high-dimensional partial differential equations that arise in the valuation of exotic derivative securities. The resulting numerical solutions are carefully compared in terms of accuracy and run…
Cutting edge introduction: Funding holes in Black-Scholes
HSBC quant builds funding costs and haircuts into Black-Scholes option pricing formula
Funding in option pricing: the Black-Scholes framework extended
Wujiang Lou shows the impact of funding costs on option valuation
Pricing and hedging variance swaps on a swap rate
A pricing tool for fixed-income volatility products is introduced
KVA: capital valuation adjustment by replication
KVA are introduced to take into account the effect of capital on funding
Path-dependent volatility
Julien Guyon on path-dependent volatility models
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…
SABR symmetry
SABR symmetry
Differential rates, differential prices
Differential rates, differential prices
Cutting Edge introduction: fixing FVA
The funding valuation adjustment (FVA) is the biggest controversy of recent times in quantitative finance. Now the authors of the original FVA paper are back – and think there may be a solution. Laurie Carver introduces this month’s technical articles
Time for a timer
Time for a timer
Stuck with collateral
Stuck with collateral
Quadratic Gaussian inflation
Quadratic Gaussian inflation
Cutting Edge introduction: Computation, computation, computation
Computation, computation, computation
Quanto adjustments in the presence of stochastic volatility
It is well known that the quanto adjustment in the drift of the underlying has a significant impact on the prices of quanto options. Alexander Giese points out that an additional quanto adjustment in the underlying’s volatility needs to be considered in…
Getting CVA up and running
Getting CVA up and running