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We consider a generic framework for generating likelihood ratio weighted Monte Carlo simulation paths, where we use one simulation scheme K° (proxy scheme) to generate realizations and then reinterpret them as realizations of another scheme K* (target scheme) by adjusting measure (via...
Persistent link: https://www.econbiz.de/10005561564
Looking at the valuation of a swap when funding costs and counterparty risk are neglected (i.e., when there is a unique risk free discounting curve), it is natural to ask "What is the discounting curve of a swap in the presence of funding costs, counterparty risk and/or collateralization". In...
Persistent link: https://www.econbiz.de/10008530717
In this paper, we present a generic method for the Monte-Carlo pricing of (generalized) auto-callable products (aka. trigger products), i.e., products for which the payout function features a discontinuity with a (possibly) stochastic location (the trigger) and value (the payout).The Monte-Carlo...
Persistent link: https://www.econbiz.de/10008914064
When managing risk, frequently only imperfect hedging instruments are at hand. We show how to optimally <italic>cross-hedge</italic> risk when the spread between the hedging instrument and the risk is <italic>stationary</italic>. For linear risk positions we derive explicit formulas for the hedge error, and for nonlinear...
Persistent link: https://www.econbiz.de/10011120668
We propose a parsimonious multi-asset Heston model and provide an easy-to-implement calibration algorithm. The model is customized to pricing multi-asset options in markets with liquidly traded single-asset options but no liquidly traded cross-asset options. In this situation, single-asset model...
Persistent link: https://www.econbiz.de/10009415366