Cross currency swaps are powerful instruments to transfer assets or liabilities from one currency into another. The market charges for this a liquidity premium, the cross currency basis spread, which should be taken into account by the valuation methodology. We describe and compare two valuation...

When pricing the convexity effect in irregular interest rate derivatives such as, e.g., Libor-in-arrears or CMS, one often ignores the volatility smile, which is quite pronounced in the interest rate options market. This note solves the problem of convexity by replicating the irregular interest...

We investigate the pricing of basket credit derivatives and their hedging with single name credit default swaps (CDS) based on a model for the joint dynamics of the fair CDS spreads. In the situation of the market flow of information being a pure jump filtration, we present an extremely...

We propose a new asset price model in continuous time where correlations and volatilities are functions of the current state of the market. The state of the market is based on a window of past asset realisations, the length of this window being a measure for the memory of the market. The...

The influence of past stock price movements on volatilities and correlations is essential for understanding diversification and contagion in financial markets. We develop a model that makes the influence of past returns on volatilities and correlations explicit. Employing information about...

The payoff of many credit derivatives depends on the level of credit spreads. In particular, the payoff of credit derivatives with a leverage component is sensitive to jumps in the underlying credit spreads. In the framework of first passage time models we address these issues by specifying a...

The payoff of many credit derivatives depends on the level of credit spreads. In particular, credit derivatives with a leverage component are subject to gap risk, a risk associated with the occurrence of jumps in the underlying credit default swaps. In the framework of first passage time models,...