Related papers: Consistent Valuation of Bespoke CDO Tranches
This paper introduces a new semi-parametric approach to the pricing and risk management of bespoke CDO tranches, with a particular attention to bespokes that need to be mapped onto more than one reference portfolio. The only user input in…
This paper addresses a key challenge in CDO modeling: achieving a perfect fit to market prices across all tranches using a single, consistent model. The existence of such a perfect-fit model implies the absence of arbitrage among CDO…
We explore the possibilities of importance sampling in the Monte Carlo pricing of a structured credit derivative referred to as Collateralized Debt Obligation (CDO). Modeling a CDO contract is challenging, since it depends on a pool of…
This paper describes a flexible and tractable bottom-up dynamic correlation modelling framework with a consistent stochastic recovery specification. The stochastic recovery specification only models the first two moments of the spot…
We propose a top-down model for cash CLO. This model can consistently price cash CLO tranches both within the same deal and across different deals. Meaningful risk measures for cash CLO tranches can also be defined and computed. This method…
In this article we present a new approach to the numerical valuation of derivative securities. The method is based on our previous work where we formulated the theory of pricing in terms of tradables. The basic idea is to fit a finite…
We use the theory of large deviations to study the pricing of investment-grade tranches of synthetic CDO's. In this paper, we consider a heterogeneous pool of names. Our main tool is a large-deviations analysis which allows us to precisely…
This paper covers a massive acceleration of Monte-Carlo based pricing method for financial products and financial derivatives. The method is applicable in risk management settings, where a financial product has to be priced under a number…
We use the theory of large deviations to study the pricing of investment-grade tranches of synthetic CDO's. In this paper, we consider a simplified model which will allow us to introduce some of the concepts and calculations.
The use of sequential Monte Carlo within simulation for path-dependent option pricing is proposed and evaluated. Recently, it was shown that explicit solutions and importance sampling are valuable for efficient simulation of spot price and…
Pricing advanced data products - particularly in complex fields such as semiconductor manufacturing - is a fundamentally challenging task due to the sparsity of publicly available transaction data, and its frequent heterogeneity and…
Analytical, free of time consuming Monte Carlo simulations, framework for credit portfolio systematic risk metrics calculations is presented. Techniques are described that allow calculation of portfolio-level systematic risk measures…
We introduce a new method to price American-style options on underlying investments governed by stochastic volatility (SV) models. The method does not require the volatility process to be observed. Instead, it exploits the fact that the…
In this article, we propose a new numerical approach to high-dimensional partial differential equations (PDEs) arising in the valuation of exotic derivative securities. The proposed method is extended from Reisinger and Wittum (2007) and…
This study presents a comparative analysis of Monte Carlo (MC) and quasi-Monte Carlo (QMC) methods in the context of derivative pricing, emphasizing convergence rates and the curse of dimensionality. After a concise overview of traditional…
Analytical, free of time consuming Monte Carlo simulations, framework for credit portfolio systematic risk metrics calculations is presented. Techniques are described that allow calculation of portfolio-level systematic risk measures…
Typically options with a path dependent payoff, such as Target Accumulation Redemption Note (TARN), are evaluated by a Monte Carlo method. This paper describes a finite difference scheme for pricing a TARN option. Key steps in the proposed…
Hedging a portfolio containing autocallable notes presents unique challenges due to the complex risk profile of these financial instruments. In addition to hedging, pricing these notes, particularly when multiple underlying assets are…
This article considers the sequential Monte Carlo (SMC) approximation of ratios of normalizing constants associated to posterior distributions which in principle rely on continuum models. Therefore, the Monte Carlo estimation error and the…
We propose a new `hedged' Monte-Carlo (HMC) method to price financial derivatives, which allows to determine simultaneously the optimal hedge. The inclusion of the optimal hedging strategy allows one to reduce the financial risk associated…