We introduce a new method to price American-style options on underlying investments governed by stochastic volatility (SV) models. The method does not require the volatility process to be observed. Instead, it exploits the fact that the optimal decision functions in the corresponding dynamic...

Local volatility models are widely used to manage many exotic options in a way consistent with available market prices of vanilla options. Once calibrated, a local volatility grid can be used in numerical methods such as PDE or Monte Carlo to price and hedge exotic options consistently with...

We analyze the market price of counterparty risk and develop an arbitrage-free pricing valuation framework, inclusive of collateral mitigation. We show that the adjustment is given by the sum of option payoff terms, depending on the netted exposure, i.e. the difference between the on-default...

We consider the problem of reducing the variance of Monte Carlo estimators of multivariate estimation problems by combining the variance reduction techniques Latin hypercube sampling with dependence (LHSD), control variates and importance sampling. Under some standard conditions, the resulting...

A credit-linked note (CLN) on a tranche of the CDX index (partially) protects the holder against default losses in that tranche. The holder receives a specified redemption amount at note maturity. The note is priced using market spread quotes for a matching CDS on this tranche

We present a simple method for “inverting” a volatility smile: that is, generating a CDF and inverse CDF given a discrete set of implied volatilities. The method is based on constructing a piece-wise linear CDF that is guaranteed to exactly reprice any non-arbitrageable input volatilities....

With financial modelling requiring a better understanding of model risk, it is helpful to be able to vary assumptions about underlying probability distributions in an efficient manner, preferably without the noise induced by resampling distributions managed by Monte Carlo methods. This article...

We develop an efficient Monte Carlo method for the valuation of a financial contract with payoff dependent on discretely realized variance. We assume a general model in which asset returns are random shocks modulated by a stochastic volatility process. Realized variance is the sum of squared...

Bilateral CVA as currently implement has the counter-intuitive effect of profiting from one's own widening CDS spreads, i.e. increased risk of default, in practice. The unified picture of CVA and liquidity introduced by Morini & Prampolini 2010 has contributed to understanding this. However,...

This paper presents a tailor-made discrete-time simulation model for valuing path-dependent options, such as lookback option, barrier option and Asian option. In the context of a real-life application that is interest to many students, we illustrate the option pricing by using Quasi Monte Carlo...