We investigate credit value adjustments (CVAs) in the presence of wrong-way risk (WWR) by introducing jumps at default to model correlation between counterparty's default and relevant risk factors. We focus on the foreign-exchange and interest-rate cases, presenting efficient CVA approximations...

In this paper, we define and model forward risk-free term rates, which appear in the payoff definition of derivatives, and possibly cash instruments, based on the new interest-rate benchmarks that will be replacing IBORs globally. We show that the classical interest rate modeling framework can...

There are several pricing and risk model applications where the assumption of a deterministic LIBOR-OIS basis can lead to severe mispricing. By modeling such a basis using a jump-diffusion process, we show how stochastic basis can impact the valuation of specific deals such as zero-coupon swaps,...

We derive an efficient closed-form approximation for the moment generating function of the integral of a mean-reverting stochastic process, following a linear SDE, which we call GARCH. We then consider a financial application, namely the pricing of a quanto CDS under stochastic intensity of...

Futures convexity adjustments in the multi-curve world depend on: i) the distribution of forward LIBORs, ii) the distribution of OIS rates, and iii) the correlation between LIBORs and OIS rates. In this article, we introduce a new multi-curve framework for pricing futures convexity adjustments....

The behaviour of a smile model when applied to hedging should be consistent with market evidence that asset prices and market smiles move in the same direction (Hagan et al. 2002). Local volatility models are criticized because not consistent with this desired behaviour, and this has been an...

The SABR closed-form formula (Hagan et. al 2002) is the standard for smile-consistent pricing in the swaption market. Here we address the issue of turning SABR assumptions into a consistent and arbitrage-free term structure model in the BGM/Libor Market Model framework. We compute the joint...

We present a simple methodology to guarantee that the total correlation structure in a Term Structure Model with one stochastic volatility factor remains positive semidefinite. We design the parameterization with the purpose of keeping as much freedom as possible for the correlation of interest...

We extend the LIBOR market model to accommodate the new market practice of using different forward and discount curves in the pricing of interest-rate derivatives. Our extension is based on modeling the joint evolution of forward rates belonging to the OIS curve and corresponding spreads with...

We extend the LIBOR market model to accommodate the new market practice of using different forward and discount curves in the pricing of interest-rate derivatives. Our extension is based on modeling the joint evolution of forward rates belonging to the discount curve and corresponding spreads...