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Technical paper/Hedging

A dynamic model for correlation

Equity markets have experienced a significant increase in correlation during the crisis, resulting in exotic derivatives portfolios realising large losses. As larger correlations in downward scenarios are already implied in the index option market in the…

A market model on the iTraxx

A market model for the dynamics of credit-risky baskets and indexes such as the iTraxx has long been sought, but because of difficulties with the natural numéraire has remained elusive. Here, Philippe Carpentier proposes using hedging arguments to…

Struck off

Credit default swaps (CDSs) offer protection against issuer default, and in general the protection is paid via a running spread rather than upfront. When the par spread changes, the contract cannot be unwound without leaving a default-contingent annuity…

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