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Pricing and hedging bond power exchange options in a stochastic string term-structure model

Blenman, Lloyd P.; Bueno-Guerrero, Alberto; Clark, Steven P. - In: Risks : open access journal 10 (2022) 10, pp. 1-17

We study power exchange options written on zero-coupon bonds under a stochastic string term-structure framework. Closed-form expressions for pricing and hedging bond power exchange options are obtained and, as particular cases, the corresponding expressions for call power options and constant...

Persistent link: https://www.econbiz.de/10013555525

A Simple Discretization Scheme for Nonnegative Diffusion Processes, with Applications to Option Pricing

Labbé, Chantal - 2010

A discretization scheme for nonnegative diffusion processes is proposed and the convergence of the corresponding sequence of approximate processes is proved using the martingale problem framework. Motivations for this scheme come typically from finance, especially for path-dependent option...

Persistent link: https://www.econbiz.de/10013142647

Numerical Solutions of PIDEs for the Prices of Bond Options, Swaps, Caps and Floors for Levy-Based Stochastic Interest Rate Models

Malyarenko, Anatoliy - 2010

In this paper, we show numerically how to calculate the price of bond options, swaps, caps and floors for Levy one-factor stochastic interest rate models via partial integro-differential equations (PIDE). These models include, in particular, Ornshtein-Uhlenbeck (1930), Vasicek (1977),...

Persistent link: https://www.econbiz.de/10013144189

Pricing Derivatives on Multiscale Diffusions : An Eigenfunction Expansion Approach

Lorig, Matthew - 2012

analytically computing the approximate price of a derivative-asset. The payoff of the derivative-asset may be path …-dependent. Additionally, the process underlying the derivative may exhibit killing (i.e. jump to default) as well as combined local …/nonlocal stochastic volatility. The nonlocal component of volatility is multiscale, in the sense that it is driven by one fast-varying and …

Persistent link: https://www.econbiz.de/10013114151

On the Pricing of Contingent Capital Notes

Madan, Dilip B. - 2011

A bank's stock price is modeled as a call option on the spread of random assets over random liabilities. The logarithm of assets and liabilities are jointly modeled as driven by four variance gamma processes and this model is estimated by calibrating to quoted equity options seen as compound...

Persistent link: https://www.econbiz.de/10013117542

Minimal Variance Hedging of Natural Gas Derivatives in Exponential Levy Models : Theory and Empirical Performance

Ewald, Christian-Oliver - 2012

We consider the problem of hedging European options written on natural gas futures, in a market where prices of traded assets exhibit jumps, by trading in the underlying asset. We provide a general expression for the hedging strategy which minimizes the variance of the terminal hedging error, in...

Persistent link: https://www.econbiz.de/10013100831

Alpha-Root Processes for Derivatives Pricing

Balakrishna, B.S. - 2010

A class of mean reverting positive stochastic processes driven by alpha-stable distributions, referred to here as alpha-root processes in analogy to the square root process (Cox-Ingersoll-Ross process), is a subclass of affine processes, in particular continuous state branching processes with...

Persistent link: https://www.econbiz.de/10013149190

Simultaneous Calibration to a Range of Portfolio Credit Derivatives with a Dynamic Discrete-Time Multi-Step Markov Loss Model

Walker, Michael B. - 2009

This article describes a dynamic discrete-time multi-step Markov model for the losses experienced by a given credit portfolio, and develops a method for the simultaneous calibration of the model to all available relevant market prices (for CDO's, forward-start CDO's, options on CDO's, leveraged...

Persistent link: https://www.econbiz.de/10013153488

Multi-Curves Framework with Stochastic Spread : A Coherent Approach to STIR Futures and Their Options

Henrard, Marc P. A. - 2013

The development of the multi-curve framework has mainly concentrated on swaps and related products. By opposition, this contribution focuses on STIR futures and their options. They are analysed in a stochastic multiplicative spread multi-curve framework which allows a simultaneous modelling of...

Persistent link: https://www.econbiz.de/10013085517

Pricing Derivatives with Optimized Gaussian Mixture

Cha, Seung Youn - 2014

theory.The research analyzes the implied volatility of the mixture model to explain how the volatility smile effect of the … financial markets with non-Gaussian distributions or stochastic volatility. The thesis proposes the optimized Gaussian mixture …

Persistent link: https://www.econbiz.de/10013050265