Related papers: Exact Pricing and Hedging Formulas of Long Dated V…
Pair trading is one of the most discussed topics among financial researches. Despite a growing base of work, portfolio management for multivariate time series is rarely discussed. On the other hand, most researches focus on refining…
The literature on volatility modelling and option pricing is a large and diverse area due to its importance and applications. This paper provides a review of the most significant volatility models and option pricing methods, beginning with…
We derive the price of a spread option based on two assets which follow a bivariate volatility modulated Volterra process dynamics. Such a price dynamics is particularly relevant in energy markets, modelling for example the spot price of…
We study a novel pricing operator for complete, local martingale models. The new pricing operator guarantees put-call parity to hold for model prices and the value of a forward contract to match the buy-and-hold strategy, even if the…
In this paper, we model financial markets with semi-Markov volatilities and price covarinace and correlation swaps for this markets. Numerical evaluations of vari- nace, volatility, covarinace and correlations swaps with semi-Markov…
In Electricity markets, illiquidity, transaction costs and market price characteristics prevent managers to replicate exactly contracts. A residual risk is always present and the hedging strategy depends on a risk criterion chosen. We…
A common assumption in financial engineering is that the market price for any derivative coincides with an objectively defined risk-neutral price - a plausible assumption only if traders collectively possess objective knowledge about the…
In a stochastic volatility framework, we find a general pricing equation for the class of payoffs depending on the terminal value of a market asset and its final quadratic variation. This allows a pricing tool for European-style claims…
The paper investigates quadratic hedging in a semimartingale market that does not necessarily contain a risk-free asset. An equivalence result for hedging with and without numeraire change is established. This permits direct computation of…
Abstract This paper proposes a novel approach to Bermudan swaption hedging by applying the deep hedging framework to address limitations of traditional arbitrage-free methods. Conventional methods assume ideal conditions, such as zero…
This paper studies the problem of determining the optimal cut-off for pairs trading rules. We consider two correlated assets whose spread is modelled by a mean-reverting process with stochastic volatility, and the optimal pair trading rule…
In this paper, we address the question of the optimal Delta and Vega hedging of a book of exotic options when there are execution costs associated with the trading of vanilla options. In a framework where exotic options are priced using a…
We consider robust pricing and hedging for options written on multiple assets given market option prices for the individual assets. The resulting problem is called the multi-marginal martingale optimal transport problem. We propose two…
This paper discusses the exact simulation of the stock price process underlying the 3/2 model. Using a result derived by Craddock and Lennox using Lie Symmetry Analysis, we adapt the Broadie-Kaya algorithm for the simulation of affine…
This paper analyzes a problem of optimal static hedging using derivatives in incomplete markets. The investor is assumed to have a risk exposure to two underlying assets. The hedging instruments are vanilla options written on a single…
This article considers the pricing and hedging of a call option when liquidity matters, that is, either for a large nominal or for an illiquid underlying asset. In practice, as opposed to the classical assumptions of a price-taking agent in…
We consider rate swaps which pay a fixed rate against a floating rate in presence of bid-ask spread costs. Even for simple models of bid-ask spread costs, there is no explicit strategy optimizing an expected function of the hedging error.…
We present a numerically efficient approach for learning a risk-neutral measure for paths of simulated spot and option prices up to a finite horizon under convex transaction costs and convex trading constraints. This approach can then be…
Derivatives on the Chicago Board Options Exchange volatility index (VIX) have gained significant popularity over the last decade. The pricing of VIX derivatives involves evaluating the square root of the expected realised variance which…
The paper introduces benchmark-neutral pricing and hedging for long-term contingent claims. It employs the growth optimal portfolio of the stocks as numeraire and the new benchmark-neutral pricing measure for pricing. For a realistic…