Showing 1 - 10 of 204
If the Black-Scholes model and its extensions were the discoveries of the 70s and 80s, then Value-at-risk (VaR) models are the darlings of the 90s. These models have many uses within an organisation; for example, a risk manager may use VaR to allocate trading limits, senior management for asset...
Persistent link: https://www.econbiz.de/10005509826
Jump diffusion models have two weaknesses: they don't allow you to hedge and the parameters are very hard to measure. Nobody likes a model that tells you that hedging is impossible (even though that may correspond to common sense) and in the classical jump-diffusion model of Merton the best that...
Persistent link: https://www.econbiz.de/10005730004
We explain the ideas behind the valuation of options with early exercise features, so called American options. We also aim to clarify some popular misconceptions about when an American option should be exercised. These misconceptions seem to be prevalent among both academics and practitioners.
Persistent link: https://www.econbiz.de/10005212067
We show how to use 'uncertainty' in place of the more traditional Brownian 'randomness' to model a short-term interest rate. The advantage of this model is principally that it is difficult to show statistically that it is wrong. Whether the model is useful for pricing fixed-income products is...
Persistent link: https://www.econbiz.de/10005212091
Two of the authors (DE and PW) recently introduced a non-probabilistic spot interest rate model. The key concepts in this model are the non-diffusive nature of the spot rate process and the uncertainty in the parameters. The model assumes the worst possible outcome for the spot rate path when...
Persistent link: https://www.econbiz.de/10005212098
This paper proves that the optimal exercise time for the holder of an American option depends upon the physical drift of the underlying asset and the utility of the option holder. We illustrate our results by applying them to several families of utility functions, namely the CARA, the HARA, and...
Persistent link: https://www.econbiz.de/10005509809
The modelling of credit risk, credit derivatives and non-hedgeable securities in general is currently in a poor state. Ideas from equity options theory have been adopted for credit risk, but have not been adapted for the peculiarities of this more complex world. This brief paper is a review and...
Persistent link: https://www.econbiz.de/10005730045
This article discusses the valuation and hedging of volatility swaps within the frame of a GARCH (1,1) stochastic volatility model. First we use a general and flexible partial differential equation (PDE) approach to determine the first two moments of the realized variance in a continuous or...
Persistent link: https://www.econbiz.de/10009215026
The passport option is a call option on the balance of a trading account. The option holder retains the gain from trading, while the writer is liable for the loss. Multi-asset passport options and passport options with discrete constraints are studied. For the first ones the pricing equations...
Persistent link: https://www.econbiz.de/10005462499
There are two types of Asian options in the financial markets which differ according to the role of the average price. We give a symmetry result between the floating and fixed-strike Asian options. The proof involves a change of numeraire and time reversal of the Brownian motion. Symmetries are...
Persistent link: https://www.econbiz.de/10005212049