We model the dynamics of asset prices and associated derivatives by consideration of the dynamics of the conditional probability density process for the value of an asset at some specified time in the future. In the case where the asset is driven by Brownian motion, an associated "master...

Motivated by the changing nature of the natural gas industry in the European Union driven by the liberalization process, we focus on pricing of gas swing options. These options are embedded in typical gas sales agreements in the form of offtake flexibility concerning volume and time. The gas...

This paper applies to the static hedge of barrier options a technique, mean-square hedging, designed to minimize the size of the hedging error when perfect replication is not possible. It introduces an extension of this technique which preserves the computational efficiency of mean-square...

Asian options are securities with a payoff that depends on the average of the underlying stock price over a certain time interval. We identify three natural assets that appear in pricing of the Asian options, namely a stock S, a zero coupon bond BT with maturity T, and an abstract asset A (an...

A callable leveraged constant maturity swap (CMS) spread note allows the holder to benefit from future changes in the spread between two swap interest rates. The issues retains the right to call the note at pre-specified times in the future. The note is priced via Monte Carlo simulation using...

The contracts written on the harmonic average of the underlying price are quite popular in the foreign exchange market. If X denotes the foreign currency and Y denotes the domestic currency, the payoff of the contract is a function of a price of an asset H which is defined asH(T) =...

The stochastic alpha beta rho (SABR) model introduced by Hagan et al. (2002) is widely used in both fixed income and the foreign exchange (FX) markets. Continuously monitored barrier option contracts are among the most popular derivative contracts in the FX markets. In this paper, we develop...

In this paper we consider the problem of hedging an arithmetic Asian option with discrete monitoring in an exponential Lévy model by deriving backward recursive integrals for the price sensitivities of the option. The procedure is applied to the analysis of the performance of the delta and...

We analyze model risk for the pricing of barrier options. In contrast to existing literature, this paper is based on an empirical data set of over 40,000 bonus certificates to analyze the real market extent of model risk for traded barrier options instead of purely synthetic options. For this...