Related papers: Repo convexity
The inclusion of DVA in the fair-value of derivative transactions has now become standard accounting practice in most parts of the world. Furthermore, some sophisticated banks are including an FVA (Funding Valuation Adjustment), but since…
A repo trade involves the sale of a security coupled with a contract to repurchase at a later time. Following the 2008 financial crisis, accounting standards were updated to require repo intermediaries, who are mostly banks, to increase…
We present a high-level framework that explains why, in practice, different pricing models calibrated to the same vanilla surface tend to produce similar valuations for exotic derivatives. Our approach acts as an overlay on the Monte Carlo…
An important question in economics is how people choose between different payments in the future. The classical normative model predicts that a decision maker discounts a later payment relative to an earlier one by an exponential function…
Cash collateral is perfect in that it provides simultaneous counterparty credit risk protection and derivatives funding. Securities are imperfect collateral, because of collateral segregation or differences in CSA haircuts and repo…
This paper develops a two-dimensional structural framework for valuing credit default swaps and corporate bonds in the presence of default contagion. Modelling the values of related firms as correlated geometric Brownian motions with…
We propose a probabilistic framework for pricing derivatives, which acknowledges that information and beliefs are subjective. Market prices can be translated into implied probabilities. In particular, futures imply returns for these implied…
Risk-neutral pricing dictates that the discounted derivative price is a martingale in a measure equivalent to the economic measure. The residual ambiguity for incomplete markets is here resolved by minimising the entropy of the price…
Pricing derivatives goes back to the acclaimed Black and Scholes model. However, such a modeling approach is known not to be able to reproduce some of the financial stylized facts, including the dynamics of volatility. In the mathematical…
We introduce an arbitrage-free framework for robust valuation adjustments. An investor trades a credit default swap portfolio with a risky counterparty, and hedges credit risk by taking a position in defaultable bonds. The investor does not…
The appropriate discount rate for evaluating policies is a critical consideration in economic decision-making. This paper presents a new model for calculating the derived discount rate for a society that includes different groups with…
We present a detailed analysis of interest rate derivatives valuation under credit risk and collateral modeling. We show how the credit and collateral extended valuation framework in Pallavicini et al (2011), and the related collateralized…
We study a variant of the Cont-Bouchaud model which utilizes the perco lation approach of multi-agent simulations of the stock market fluctuations. Here, instead of considering the relative price change as the difference of the total demand…
We construct models for the pricing and risk management of inflation-linked derivatives. The models are rational in the sense that linear payoffs written on the consumer price index have prices that are rational functions of the state…
Spot option prices, forwards and options on forwards relevant for the commodity markets are computed when the underlying process S is modelled as an exponential of a process {\xi} with memory as e.g. a L\'evy semi-stationary process.…
Customer loyalty is crucial for internet services since retaining users of a service to ensure the staying time of the service is of significance for increasing revenue. It demands the retention of customers to be high enough to meet the…
In a market with stochastic interest rates, we consider an investor who can either (i) invest all if his money in a savings account or (ii) purchase zero-coupon bonds and invest the remainder of his wealth in a savings account. The…
We reconsider the problem of option pricing using historical probability distributions. We first discuss how the risk-minimisation scheme proposed recently is an adequate starting point under the realistic assumption that price increments…
We consider a financial market in which the short rate is modeled by a continuous time Markov chain (CTMC) with a finite state space. In this setting, we show how to price any financial derivative whose payoff is a function of the state of…
A bubble is characterized by the presence of an underlying asset whose discounted price process is a strict local martingale under the pricing measure. In such markets, many standard results from option pricing theory do not hold, and in…