Polynomial splines are popular in the estimation of discount bond term structures, but suffer from well-documented problems with spurious inflection points, excessive convexity, and lack of locality in the effects of input price perturbations. In this paper, we address these issues through the...

In this paper, we demonstrate that many stochastic volatility models have the undesirable property that moments of order higher than one can become infinite in finite time. As arbitrage-free price computation for a number of important fixed income products involves forming expectations of...

We leverage the new framework for collateralized exposure modelling in Andersen, Pykhtin, and Sokol (2016) to analyze credit risk on positions collateralized with both variation and initial margin. Special attention is paid to the dynamic BCBS-IOSCO uncleared margin rules soon to be mandated for...

We develop a new high-performance spectral collocation method for the computation of American put and call option prices. The proposed algorithm involves a carefully posed Jacobi-Newton iteration for the optimal exercise boundary, aided by Gauss-Legendre quadrature and Chebyshev polynomial...

Banks hold and routinely exercise the option of freely re-hypothecating variation margin across counterparties and trades. However, the emerging FCA/FBA standards for funding cost accounting are mostly formulated in terms of netting set specific metrics that fail to properly account for...

We recently introduced the FVA/FDA accounting framework for funding costs, aiming to provide an accounting method that reasonably balances the, often conflicting, concerns of accountants, regulators, traders, and financial economists. While introduction of FVA/FDA accounting does not lead to...

We consider the problem of quantifying credit and funding risks in the presence of initial margin calculated by dynamically updated risk measures, such as Value-at-Risk and Expected Shortfall. The analytic scaling approach proposed in Andersen et al. [2] is generalized from a system driven by...

While convertible bond models recently have come to rest on solid theoretical foundation, issues in model calibration and numerical implementation still remain. This paper highlights and quantifies a number of such issues, demonstrating, among other things, that naiuml;ve calibration approaches...

This paper introduces stochastic volatility to the Libor market model of interest rate dynamics. As in Andersen and Andreasen (2000a) we allow for non-parametric volatility structures with freely specifiable level dependence (such as, but not limited to, the CEV formulation), but now also...

This paper presents a number of new theoretical results for replication of barrier options through a static portfolio of European put and call options. Our results are valid for options with completely general knock-out/knock-in sets, and allow for time- and state-dependent volatility as well as...