Related papers: Static and semi-static hedging as contrarian or co…
The vast majority of works on option pricing operate on the assumption of risk neutral valuation, and consequently focus on the expected value of option returns, and do not consider risk parameters, such as variance. We show that it is…
We propose a new method of measuring the third and fourth moments of return distribution based on quadratic variation method when the return process is assumed to have zero drift. The realized third and fourth moments variations computed…
Barrier options are one of the most widely traded exotic options on stock exchanges. In this paper, we develop a new stochastic simulation method for pricing barrier options and estimating the corresponding execution probabilities. We show…
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 research presents a comprehensive evaluation of systematic index option-writing strategies, focusing on S&P500 index options. We compare the performance of hedging strategies using the Black-Scholes-Merton (BSM) model and the…
The two main issues for managing wrong way risk (WWR) for the credit valuation adjustment (CVA, i.e. WW-CVA) are calibration and hedging. Hence we start from a novel model-free worst-case approach based on static hedging of counterparty…
Building on the functional-analytic framework of operator-valued kernels and un-truncated signature kernels, we propose a scalable, provably convergent signature-based algorithm for a broad class of high-dimensional, path-dependent hedging…
We consider a non-stationary variant of a sequential stochastic optimization problem, in which the underlying cost functions may change along the horizon. We propose a measure, termed variation budget, that controls the extent of said…
Proof that under simple assumptions, such as constraints of Put-Call Parity, the probability measure for the valuation of a European option has the mean derived from the forward price which can, but does not have to be the risk-neutral one,…
Value-at-risk (VaR) has been playing the role of a standard risk measure since its introduction. In practice, the delta-normal approach is usually adopted to approximate the VaR of portfolios with option positions. Its effectiveness,…
In the first quarter of 2006 Chicago Board Options Exchange (CBOE) introduced, as one of the listed products, options on its implied volatility index (VIX). This created the challenge of developing a pricing framework that can…
Prepayment risk embedded in fixed-rate mortgages forms a significant fraction of a financial institution's exposure. The embedded prepayment option bears the same interest rate risk as an exotic interest rate swap with a suitable stochastic…
The presence of discrete dividends complicates the derivation and form of pricing formulas even for vanilla options. Existing analytic, numerical, and theoretical approximations provide results of varying quality and performance. Here, we…
In this paper, we develop a 4/2 stochastic volatility plus jumps model, namely, a new stochastic volatility model including the Heston model and 3/2 model as special cases. Our model is highly tractable by applying the Lie symmetries theory…
We study the problem of option replication under constant proportional transaction costs in models where stochastic volatility and jumps are combined to capture the market's important features. Assuming some mild condition on the jump size…
We show how D4PG can be used in conjunction with quantile regression to develop a hedging strategy for a trader responsible for derivatives that arrive stochastically and depend on a single underlying asset. We assume that the trader makes…
Robust, or model-independent properties of the variance swap are well-known, and date back to Dupire and Neuberger, who showed that, given the price of co-terminal call options, the price of a variance swap was exactly specified under the…
Excessive leverage, i.e. the abuse of debt financing, is considered one of the primary factors in the default of financial institutions. Systemic risk results from correlations between individual default probabilities that cannot be…
The Greeks Delta and Gamma of plain vanilla options play a fundamental role in finance, e.g., in hedging or risk management. These Greeks are approximated in many models such as the widely used Variance Gamma model by Fourier techniques…
We consider a square-integrable semimartingale and investigate the convex order relations between its discrete, continuous and predictable quadratic variation. As the main results, we show that if the semimartingale has conditionally…