Showing 1 - 10 of 21
In this paper, we present an alternative approach as a suitable framework under which liability driven investments can be valued and hedged. This benchmark approach values both assets and liabilities consistently under the real world probability measure using the best performing portfolio, the...
Persistent link: https://www.econbiz.de/10010883496
This paper considers a new class of Monte Carlo methods that are combined with PDE expansions for the pricing and hedging of derivative securities for multidimensional diffusion models. The proposed method combines the advantages of both PDE and Monte Carlo methods and can be directly applied to...
Persistent link: https://www.econbiz.de/10010888484
Many providers of variable annuities such as pension funds and life insurers seek to hedge their exposure to embedded guarantees using longdated derivatives. This paper extends the benchmark approach to price and hedge long-dated equity index options using a combination of cash, bonds and...
Persistent link: https://www.econbiz.de/10011267814
The paper discusses the problem of hedging not perfectly replicable contingent claims by using a benchmark, the numerraire portfolio, as reference unit. The proposed concept of benchmarked risk minimization generalizes classical risk minimization, pioneered by Follmer, Sondermann and Schweizer....
Persistent link: https://www.econbiz.de/10009357762
This paper derives explicit formulas for both the small and large time limits of the implied volatility in the minimal market model. It is shown that interest rates do impact on the implied volatility in the long run even though they are negligible in the short time limit.
Persistent link: https://www.econbiz.de/10009357763
In this paper, we discuss how to model credit risk under the benchmark approach. Firstly we introduce an affine credit risk model. We then show how to price credit default swaps (CDSs) and introduce credit valuation adjustment (CVA) as an extension of CDSs. In particular, our model can capture...
Persistent link: https://www.econbiz.de/10010754094
The paper derives a parsimonious two-component affine diffusion model for a world stock index to capture the dynamics of aggregate wealth. The observable state variables of the model are the normalized index and the inverse of the stochastic market activity, both modeled as square root...
Persistent link: https://www.econbiz.de/10010754096
The paper derives a parsimonious two-component affine diffusion model with one driving Brownian motion to capture the dynamics of oil prices. It can be observed that the oil price behaves in some sense similarly to the US dollar. However, there are also clear differences. To identify these the...
Persistent link: https://www.econbiz.de/10010754099
This paper proposes a consistent benchmark approach to price weather derivatives. The growth optimal portfolio to price weather derivatives. The growth optimal portfolio is used as numeraire such that all benchmarked fair price processes are martingales. No measure transformation is needed for...
Persistent link: https://www.econbiz.de/10004984459
Monetary policy has pursued the concept of inflation targeting. This has been implemented in many countries. Here interest rates are supposed to respond to an inflation gap and output gap. Despite long term continuing growth of the world financial assets, recently, monetary policy, in particular...
Persistent link: https://www.econbiz.de/10004984475