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Options with embedded early exercise features are of fundamental importance in finance. A simple example is the hedge of a multi-callable bond. This instrument is hedged using a Bermudan swaption.Bermudan swaptions also play a key role when pricing callable constant maturity swaps or flexible...
Persistent link: https://www.econbiz.de/10013118643
The main goal of this paper is to better understand the behavior of credit spreads in the past and the potential risk of unexpected future credit spread changes. One important consideration to note regarding credit spreads is the fact that bond spreads contain a liquidity premium, which...
Persistent link: https://www.econbiz.de/10013105185
Financial institutions and regulators usually measure credit risk only over a one-year time horizon. Hence, current statistical models can generate closed-form expressions for the one-year loss distribution. Losses over longer horizons are considered using scenario analysis or Monte Carlo...
Persistent link: https://www.econbiz.de/10012995062
A very influential model in the determination of capital requirements for credit exposures is Vacisek's model. This model underpins the Basel framework for credit exposures of financial institutions. Vacisek's model uses information on asset correlation and the unconditional mean of the...
Persistent link: https://www.econbiz.de/10012847692
Implied volatility skew and smile are ubiquitous phenomena in the financial derivative market especially after the Black Monday 1987 crash. Various stochastic volatility models have been proposed to capture volatility skew and smile in derivative pricing and hedging. Almost 30 years after the...
Persistent link: https://www.econbiz.de/10012868202
The Polynomial Chaos Expansion (PCE) technique recovers a finite second order random variable exploiting suitable linear combinations of orthogonal polynomials which are functions of a given stochastic quantity $\xi$, hence acting as a kind of random basis. The PCE methodology has been developed...
Persistent link: https://www.econbiz.de/10013018868
This paper describes an American Monte Carlo approach for obtaining fast and accurate exercise policies for pricing of callable LIBOR Exotics (e.g., Bermudan swaptions) in the LIBOR market model using the Stochastic Grid Bundling Method (SGBM). SGBM is a bundling and regression based Monte Carlo...
Persistent link: https://www.econbiz.de/10013022125
In this note we consider a classical term structure model framework, that is, a HJM framework on a time-discrete tenor, like the LIBOR market model, using a sequence of tenor discretization, where the tenors are valid for a specific simulation time interval.The setup then allows to model dynamic...
Persistent link: https://www.econbiz.de/10012967032
We consider the subject of approximating tail probabilities in the general compound renewal process framework, where severity data are assumed to follow a heavy-tailed law (in that only the first moment is assumed to exist). By using weak convergence of compound renewal processes to Lévy...
Persistent link: https://www.econbiz.de/10012955395
The problem of developing sensitivities of exotic interest rates derivatives to the observed implied volatilities of caps and swaptions is considered. It is shown how to compute these from sensitivities to model volatilities in the displaced diffusion LIBOR market model. The example of a...
Persistent link: https://www.econbiz.de/10013149157