This paper studies option pricing based on a reverse engineering (RE) approach. We utilize artificial intelligence in order to numerically compute the prices of options. The data consist of more than 5000 call- and put-options from the German stock market. First, we find that option pricing...

This book provides a systematic study on the optimal timing of trades in markets with mean-reverting price dynamics. We present a financial engineering approach that distills the core mathematical questions from different trading problems, and also incorporates the practical aspects of trading,...

Robert C. Merton is the School of Management Distinguished Professor of Finance at Massachusetts Institute of Technology, and the John and Natty McArthur University Professor Emeritus at Harvard University. Merton received the Alfred Nobel Memorial Prize in Economic Sciences in 1997 for a new...

Credit Default Swaps, as the name indicates, are credit instruments used by banks, non-banking financial institutions, hedge funds and investors, so as to shift risk from one party to another (Mengle, 2007). These instruments are rife with controversy and opposing arguments with regard to...

Credit default swaps (CDSs) and deep out-of-the-money put (DOOMP) options can both be used as a credit protection instrument. However, partial market segmentation results in deviations between firm hazard rates implied by these contracts. These deviations are driven by a systematic...

Banks increasingly recognize the need to measure and manage the credit risk of their loans on a portfolio basis. We address the subportfolio "middle market". Due to their specific lending policy for this market segment it is an important task for banks to systematically identify regional and...

This study analyzes the loss potential arising from investments into CDS for a sample of large U.S. and German mutual funds. Further, it investigates whether the comments funds make on CDS use in periodic fund reports are consistent with the disclosed CDS holdings. For several funds in the U.S.,...

This study analyzes the loss potential arising from investments into CDS for a sample of large U.S. and German mutual funds. Further, it investigates whether the comments funds make on CDS use in periodic fund reports are consistent with the disclosed CDS holdings. For several funds in the U.S.,...