Technical paper/Option pricing
Downgrade termination costs
Downgrade termination costs
Cutting Edge introduction: requiem for a probabilist
Requiem for a probabilist
Perturbed Gaussian copula: introducing the skew effect in co-dependence
Perturbed Gaussian copula: introducing the skew effect in co-dependence
Being particular about calibration
Following previous work on the calibration of multi-factor local stochastic volatility models to market smiles, Julien Guyon and Pierre Henry-Labordère show how to calibrate exactly any such model. Their approach, based on McKean’s particle method,…
Repricing the cross smile: an analytic joint density
Repricing the cross smile: an analytic joint density
Marking systemic portfolio risk with the Merton model
Marking systemic portfolio risk with the Merton model
Stressed in Monte Carlo
Stressed in Monte Carlo
Volatility interpolation
Volatility interpolation
Choice of collateral currency
Collateral agreements are becoming popular in the over-the-counter derivatives market. Masaaki Fujii and Akihiko Takahashi demonstrate its significant impact on derivatives pricing with a direct link to the cross-currency market. The importance of…
Choice of collateral currency
Choice of collateral currency
Correlations in asynchronous markets
Correlations in asynchronous markets
Expanded smiles
Implementing models with stochastic as well as deterministic local volatility can be challenging. Here, Jesper Andreasen and Brian Huge describe an expansion approach for such models that avoids the high-dimensional partial differential equations usually…
Funding beyond discounting: collateral agreements and derivatives pricing
Standard theory assumes traders can lend and borrow at a risk-free rate, ignoring the intricacies of the repo and collateralisation markets. Here, Vladimir Piterbarg shows that these force adjustments to discounting, forward prices and implied…
Smile dynamics IV
Lorenzo Bergomi addresses the relationship between the smile that stochastic volatility models produce and the dynamics they generate for implied volatilities. He introduces a new quantity, the skew stickiness ratio (SSR), and shows how, at order one in…
Last option before the armageddon
Damiano Brigo and Massimo Morini show how the pricing of credit index options depends on the probability of a financial portfolio 'armageddon'. They introduce a new equivalent pricing measure that lays the foundation for a market model framework in multi…
Stepping through Fourier space
Diverse finite-difference schemes for solving pricing problems with Levy underlyings appear in financial literature. Invariably, the integral and diffusive terms are treated asymmetrically, large jumps are truncated, and the methods are difficult to…
Information derivatives
Andrei Soklakov considers the problem of creating derivatives to provide tailored exposure to volatility risk. Information theory leads us to a whole class of such products. This class of 'information derivatives' includes the standard volatility…
Information derivatives
Andrei Soklakov considers the problem of creating derivatives to provide tailored exposure to volatility risk. Information theory leads us to a whole class of such products. This class of 'information derivatives' includes standard volatility products -…
A short cut to the rainbow
Per Horfelt designs an efficient and accurate method to price many popular multi-asset options such as options on the minimum and maximum of several assets and podiums. The method is based on a modification of the conditional independence model and is…
Information derivatives
This paper considers the problem of creating derivatives to provide tailored exposure to volatility risk
Vix option pricing in a jump-diffusion model
Artur Sepp discusses Vix futures and options and shows that their market prices exhibit positive volatility skew. To better model the market behaviour of the S&P 500 index and its associated volatility skew, he introduces the stochastic dynamics of the…
Information derivatives
Andrei Soklakov considers the problem of creating derivatives to provide tailored exposure to volatility risk. Information theory leads us to a whole class of such products. This class of 'information derivatives' includes the standard volatility…