In the framework of Black-Scholes-Merton option pricing models, by employing exotic options instead of plain options or warrants, this paper presents an equivalent decomposition method for usual Callable Convertible Bonds (CCB). Furthermore, the analytic valuation formulae for CCB are worked out...

It is known that actual option prices deviate from the Black-Scholes formula using the same volatility for different strikes. For the S&P 500 index options, we find that these deviations follow a stable pattern and are described by a simple function of at-the-money-forward total volatility. This...

An important purpose of derivatives modelling is to provide practitioners with actionable measures of risk. The Black and Scholes volatility remains a favourite on trading floors in spite of well-known biases. One popular extension is to make volatility a function of time and the underlying...

This article intends to evidence the flexibility effect in the investment decision. This flexibility is known by the real options term, these options possess value, which will increase the value of an investment that possesses them. The traditional investments evaluation methods are not enough...

In derivatives modelling, it has often been necessary to make assumptions about the volatility of the underlying variable over the life of the contract. This can involve specifying an exact trajectory, as in the Black and Scholes (1973), Merton (1973) or Black (1976) models; one that depends on...

The Asset Backed CDS contract was introduced in 2005 as an extension of the standard corporate CDS. It generally trades under the ISDA "pay-as-you-go'' (PAUG) confirmation which handles the unique features of ABS - amortization, principal writedowns and interest shortfalls. The current market...

In this article we discuss fundamentals of the debt securities pricing. We begin with a generalization of the present value concept. Though the present value is the base valuation method in the modern finance we will illustrate that this concept does not sufficiently accurate in producing...

A new alternative diffusion model for asset price movements is presented. In contrast to the popular approach of Brownian motion it proposes deterministic diffusion for the modelling of stock price movements. These diffusion processes are a new area of physical research and can be created by the...

In this paper we study volatility functions. Our main assumption is that the volatility is deterministic or stochastic but driven by a Brownian motion independent of the stock. We propose a forecasting method and check the consistency with option pricing theory. To estimate the unknown...

A fast and accurate method for pricing early exercise and certain exotic options in computational finance is presented. The method is based on a quadrature technique and relies heavily on Fourier transformations. The main idea is to reformulate the well-known risk-neutral valuation formula by...