We consider minimal variance hedging in a pure-jump multi-curve interest rate model. In the first part, we derive arithmetic multi-factor martingale representations for the spread, OIS and LIBOR rate which are bounded from below by a real-valued constant. In the second part, we investigate...

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,...

This paper considers Merton's (1973) model for partial equilibrium bond option pricing when stochastic bond price processes are involved. A log-normal process with a stochastic drift is suggested that allows the price of a pure discount bond to converge to its face value upon maturity. The...

We explore a multi-asset jump-diffusion pricing model, combining a systemic risk asset with several conditionally independent ordinary assets. Our approach allows for analyzing and modeling a portfolio that integrates high-activity security, such as an exchange trading fund (ETF) tracking a...

A relatively simple approach to correlating unit period returns of Lévy processes is developed. We write the Lévy process as a time changed Brownian motion and correlate the Brownian motions. It is shown that sample correlations understate the required correlation between the Brownian motions...

A bank's stock price is modeled as a call option on the spread of random assets over random liabilities. The logarithm of assets and liabilities are jointly modeled as driven by four variance gamma processes and this model is estimated by calibrating to quoted equity options seen as compound...

This study shows how to simulate Lévy process to price options and also demonstrate empirically that Lévy process can do a better job explaining option prices than Black-Scholes Model. This study also shows how to simulate Wiener process

We develop a new method for pricing options on discretely sampled arithmetic average in exponential L'evy models. The main idea is the reduction to a backward induction procedure for the difference W_n between the Asian option with averaging over n sampling periods and the price of the European...