In this work we are concerned with valuing the option to invest in a project when the project value and the investment cost are both mean-reverting. Previous works on stochastic project and investment cost concentrate on geometric Brownian motions (GBMs) for driving the factors. However, when...

We calibrate the local volatility surface for European options across all strikes and maturities of the same underlying. There is no interpolation or extrapolation of either the option prices or the volatility surface. We do not make any assumption regarding the shape of the volatility surface...

Regulators and central banks are defining-through mathematical formulae-the market microstructure for the calculation of fixings for LIBOR interest rate swaps in terms of the relevant swap rates that reference the Risk-Free Rate that will replace a particular LIBOR post its cessation. The...

To improve risk management in the European Union Emissions Trading Scheme (EU ETS), the European Climate Exchange (ECX) has introduced option instruments in October 2006 after regulatory authorization. The central question we address is: can we identify a potential destabilizing effect of the...

We develop a new approach to approximating asset prices in the context of continuous-time models. For any pricing model that lacks a closed-form solution, we provide a closed-form approximate solution, which relies on the expansion of the intractable model around an “auxiliary” one. We...

In a two-period setup we develop a generalization of good-deal bounds that allows to include in the problem the implications of asset pricing models. Our basis is the distance behind Hansen and Jagannathan's measure of model misspecification since a volatility constraint on the stochastic...

Risk neutral densities (RND) can be used to forecast the price of the underlying basis for the option, or it may be used to price other derivates based on the same sequence. The method adopted in this paper to calculate the RND is to firts estimate daily the diffusion process of the underlying...

Probability density function (pdf) for (weighted) sum of n correlated lognormal variables is deducted. The method uses joint pdf of multivariate correlated lognormal variables and an extended method of convolution. The formula contains (n-1)-fold integral, which can be evaluated by numerical...