We develop a novel, workable switching option model approach to component redesign and replacement projects that are divisible into sequential phases. The component manufacturer has the option to retain the current product position and abandon the project, or switch to a redesigned product...

In this paper we investigate the use of finite difference and finite element schemes when applied to the valuation of exotic options characterized by discontinuities in the payoff function. In particular, we will conduct a numerical analysis of several common schemes in order to give a better...

In this paper we present a new general method for simulating integrals of stochastic processes. We focus on the nontrivial case of time integrals conditional on the state variable levels at the endpoints of a time interval, based on a moment-based probability distribution construction. We...

In this paper we investigate the contribution of structured bonds to the efficient frontier. We conduct our analysis by simulating the term structure according to a no-arbitrage multifactor model (G2 ) and comparing the performance of basic products (like zero-coupon bond, coupon bond and...

The aim of this paper is to shed new light on the concept of diversification showing that it is not necessarily related to the reduction of the volatility of a portfolio, as it is commonly perceived. We introduce a diversification index that exploits the decomposition of portfolio volatility...

We compute an analytical expression for the moment generating function of the joint random vector consisting of a spot price and its discretely monitored average for a large class of square-root price dynamics. This result, combined with the Fourier transform pricing method proposed by Carr and...

This paper is an introduction to the measurement of market risk in financial markets, with examples drawn mainly from commodity markets. In particular, we present the concept of VaR, its limits, the problems related to its estimation and backtesting. This is done at single asset and at portfolio...

We derive a closed-form formula for the fair value of call and put options written on the arithmetic average of security prices driven by jump diffusion processes displaying (possibly periodical) trend, time varying volatility, and mean reversion. The model allows one for jointly fitting quoted...