This paper investigates the pricing of discrete knock-out options with tree methods. As is well known, the naive application of the binomial model can result in erroneous prices, even if the number of time steps is large. We develop a correction technique for the binomial and trinomial model...

This paper evaluates the performance of various factor models with firm-specific variables in forecasting correlation matrices at the German stock market. We investigate forecasts of correlations for a comprehensive sample and a sample of blue chips and analyze the impact of stock market crashes...

Volatility has evolved as an attractive new asset class of its own. The most common instruments for trading volatility are variance swaps. Mean returns of DAX and ESX variance swaps over the time period of 1995 to 2004 are strongly negative, and only part of the negative premium can be explained...

The market for structured financial products in Switzerland is considered the largest in the world. Its most successful products are multi-asset reverse convertibles with knock-in barriers. We analyze whether these complex instruments are fairly priced. Using a numerical, tree-based valuation...

Volatility movements are known to be negatively correlated with stock index returns. Hence, investing in volatility appears to be attractive for investors seeking risk diversification. The most common instruments for investing in pure volatility are variance swaps, which now enjoy an active...

The implied volatilities provided by OptionMetrics in the IvyDB database suggest substantial deviations from put-call parity that do not really exist. In S&P 500 options, artificial deviations occur because OptionMetrics uses non-synchronous index and option prices and an average implied...