We present a generic framework to manage gap risk for financial products involving large digital risks due to discontinuous payouts or barriers. The approach modifies the boundary conditions of the pricing PDE so that a given delta limit is not breached. In comparison to other techniques such as...

In this paper we develop a local correlation model which uses a universal function g(t,m_i,m_j) to describe the local correlation between any asset-asset pair of a basket of underlyings. The arguments m_i,m_j are spot moneynesses.The universal function is calibrated to fit the implied...

The two most popular equity and FX derivatives pricing models in banking practice are the local volatility model and the Heston model. While the former has the appealing property that it can be calibrated exactly to any given set of arbitrage free European vanilla option prices, the latter...

Background and target:The optimization of single assets or a portfolio of assets is a ubiquitous task in energy and commodity trading. Assets may be of various types, such as storage facilities (e.g. batteries or water reservoirs for power, heat or gas storage), decentralized or large power...

We introduce a simple version of the local in index correlation model where the correlation function does not depend on the index, but on a synthetic index computed from just the Brownian motion driving the multivariate equity process. The model fits the index smile as good as the respective...

In this paper we develop a Monte-Carlo method to price instruments with discontinuous payoffs and non-smooth trigger functions which allows for a stable computation of Greeks via finite differences. The method extends the idea of smoothing the payoff as in Glasserman's book on Monte-Carlo...