Related papers: A Computational Approach to Hedging Credit Valuati…
The credit crisis and the ongoing European sovereign debt crisis have highlighted the native form of credit risk, namely the counterparty risk. The related Credit Valuation Adjustment, (CVA), Debt Valuation Adjustment (DVA), Liquidity…
In this work we rigorously establish mathematical models to obtain the capital valuation adjustment (KVA) as part of the total valuation adjustments (XVAs). For this purpose, we use a semi-replication strategy based on market theory. We…
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 main result of this paper is a collateralized counterparty valuation adjusted pricing equation, which allows to price a deal while taking into account credit and debit valuation adjustments (CVA, DVA) along with margining and funding…
A new challenge to quantitative finance after the recent financial crisis is the study of credit valuation adjustment (CVA), which requires modeling of the future values of a portfolio. In this paper, following recent work in [Weinan…
During the COVID-19 pandemic, many institutions have announced that their counterparties are struggling to fulfill contracts.Therefore, it is necessary to consider the counterparty default risk when pricing options. After the 2008 financial…
In this paper, our focus lies on the Merton's jump diffusion model, employing jump processes characterized by the compound Poisson process. Our primary objective is to forecast the drift and volatility of the model using a variety of…
Suppose an investor aims at Delta hedging a European contingent claim $h(S(T))$ in a jump-diffusion model, but incorrectly specifies the stock price's volatility and jump sensitivity, so that any hedging strategy is calculated under a…
In this paper, we combine modern portfolio theory and option pricing theory so that a trader who takes a position in a European option contract and the underlying assets can construct an optimal portfolio such that at the moment of the…
In the aftermath of the 2007 global financial crisis, banks started reflecting into derivative pricing the cost of capital and collateral funding through XVA metrics. Here XVA is a catch-all acronym whereby X is replaced by a letter such as…
Credit risk may be warehoused by choice, or because of limited hedging possibilities. Credit risk warehousing increases capital requirements and leaves open risk. Open risk must be priced in the physical measure, rather than the risk…
This article presents a generic model for pricing financial derivatives subject to counterparty credit risk. Both unilateral and bilateral types of credit risks are considered. Our study shows that credit risk should be modeled as American…
We price and replicate a variety of claims written on the log price $X$ and quadratic variation $[X]$ of a risky asset, modeled as a positive semimartingale, subject to stochastic volatility and jumps. The pricing and hedging formulas do…
We develop a liquidity-sensitive multivariate volatility framework to improve the estimation of time-varying covariance structures under market frictions. We introduce two novel portfolio-level liquidity measures, liquidity jump and…
We present a simulation-and-regression method for solving dynamic portfolio allocation problems in the presence of general transaction costs, liquidity costs and market impacts. This method extends the classical least squares Monte Carlo…
This paper investigates the pricing of financial derivatives and the calculation of their delta Greek when the underlying asset is a jump-diffusion process in which the stochastic intensity component follows the CIR process. Utilizing…
We study continuous-time mean--variance portfolio selection in markets where stock prices are diffusion processes driven by observable factors that are also diffusion processes, yet the coefficients of these processes are unknown. Based on…
Following the foundational work of the Black--Scholes model, extensive research has been developed to price the option by addressing its underlying assumptions and associated pricing biases. This study introduces a novel framework for…
Credit Valuation Adjustment captures the difference in the value of derivative contracts when the counterparty default probability is taken into account. However, in the context of a network of contracts, the default probability of a direct…
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…