Numerics for SLV models in FX markets
|
|
- Griselda Snow
- 5 years ago
- Views:
Transcription
1 Numerics for SLV models in FX markets Christoph Reisinger Joint with Andrei Cozma, Ben Hambly, & Matthieu Mariapragassam Mathematical Institute & Oxford-Man Institute University of Oxford Project partially funded by OMI and BNPP London Models and Numerics in Financial Markets, 27 May 2015
2 OUTLINE Introduction Derivative Pricing Models Markovian Projections Dupire-Type Formula for Barrier Options Main Result Dupire-type Formula Forward PIDE for Barrier Options Numerical Approximation Monte Carlo Exotics Pricing Under SLV
3 FRAMEWORK In derivative pricing we try to accurately estimate the prices of OTC exotic contracts (accumulator, cliquet) hedge ratios with contracts available on the listed market (calls, barriers). Underlying spot processes are calibrated to data. It is an inverse problem: Given quoted vanillas, what can one say about the spot diffusion. It is ill-posed: stability of calibrated parameters problematic. Regularization (mathematically!) well-posed problem
4 MODELS FOR EXOTICS PRICING LOCAL VOLATILITY ds t S t = (r q) dt + σ (S t, t) dw t Widely used for OTC contracts with barriers (even if not perfect) Exact repricing of calls Forward smile flattens out with time bad for cliquets Application to long-dated FX, e.g., Deelstra and Rayeé (2012) sigma T K Figure: S&P500: Left: Implied volatility. Right: Local volatility.
5 LOCAL VOLATILITY AND DUPIRE Recall the local volatility model: ds t S t = (r q) dt + σ (S t, t) dw t The parameter σ (S t, t) has to be calibrated such that for any call of strike K, maturity T: C (K, T) = E Q [ exp ( rt) (S T K) +] = C Market (K, T) Theorem (Dupire) The market-consistent local volatility parameter σ is given by: ( C(K,T) (r (T) q (T)) σ 2 T (K, T) = 1 2 K2 2 C(K,T) K 2 C (K, T) K C(K,T) K )
6 LOCAL VOLATILITY AND DUPIRE Recall the local volatility model: ds t S t = (r q) dt + σ (S t, t) dw t The parameter σ (S t, t) has to be calibrated such that for any call of strike K, maturity T: C (K, T) = E Q [ exp ( rt) (S T K) +] = C Market (K, T) Theorem (Dupire) The market-consistent local volatility parameter σ is given by: ( C(K,T) (r (T) q (T)) σ 2 T (K, T) = 1 2 K2 2 C(K,T) K 2 C (K, T) K C(K,T) K Dupire formula very sensitive to approximation/interpolation: Small change in input market prices big change in local volatility Extremely bad for adapted Greeks (adapted Gamma particularly) )
7 DUPIRE FORWARD PDE AND REGULARISATION Corollary The call price C (K, T) is the solution to a Forward PDE ( ) C(K,T) + r (T) C (K, T) + K C(K,T) 1 T K 2 σ2 (K, T) K 2 2 C(K,T) = 0, K 2 C (K, 0) = (S 0 K) + C (0, T) = S 0 D(T) Opens the possibility to regularize the problem well-posedness. Idea: Minimize over σ at each maturity T: N K ( f T (σ) = i=1 C LocVol T,K i where P a regularization term. (σ) C Market T,K i ) 2 + λ P (σ), Penalise non-desirable local vol shapes: non-convex, non-smooth,... Theoretical results by Berestycki, Busca and Florent (2002), Crepey (2003), Egger & Engl (2005), Achdou & Pironneau (2005),...
8 MODELS FOR EXOTICS PRICING HESTON ds t S t = (r q) dt + V tdw t, dv t = κ (θ V t) dt + ξ V tdw v t Good smile and spot-vol dynamics (with correlation ρ) Good model for forward start features (cliquet/compound) No exact calibration to calls drawback for pricing Heston Calibrated Volatility Surface 0.42 sigma T T K K Figure: S&P500: Left: Implied volatility. Right: Fitted model implied vol.
9 MODELS FOR EXOTIC PRICING LSV Local-stochastic volatility: ds t S t = (r q) dt + σ (S t, t) V t dw t dv t = κ (θ V t) dt + ξ V t dwt v d[w t, Wt V ] = ρ dt. Spot-vol dynamics and smile regeneration Better model for most exotics Smile dynamics is good and can be controlled (trough the vol-of-vol)
10 MODELS FOR EXOTIC PRICING LSV Local-stochastic volatility: ds t S t = (r q) dt + σ (S t, t) V t dw t dv t = κ (θ V t) dt + ξ V t dwt v d[w t, Wt V ] = ρ dt. Spot-vol dynamics and smile regeneration Better model for most exotics Smile dynamics is good and can be controlled (trough the vol-of-vol) Calibration can be involved and time consuming. Bootstrapping with Kolmogorov forward equation, see Ren, Madan, & Qian (2007). Approximations, e.g., Bompis & Gobet (2015), Lorig, Pagliarini, & Pascucci (2014)
11 MODEL CLASS We consider Itô process models of the form ds t S t = (r q) dt + α tdw t, where α a continuous semi-martingale such that [ T ] E αt 2 S 2 t dt <. 0 Example: Local-Stochastic Volatility (LSV) model of Heston-type: α t = σ (S t, t) V t dv t = κ (θ V t) dt + ξ V tdwt v dw tdwt V = ρdt We are ultimately interested in situations such as κ = κ(v t, t) (Dai, Tang, & Yue 2012), ξ = ξ(s t, t) etc. [NB: Moment conditions on model parameters apply.]
12 MIMICKING AN ITÔ PROCESS Recall ds t S t = (r q) dt + α t dw t. Definition The Markovian projection of α 2 t onto S t is [ ] σ 2 S (K, t) = E Q αt 2 S t = K. Theorem (Gyöngy 1986) There exists a weak solution X t to the SDE dx t X t = (r q) dt + σ S (X t, t) dw t, such that the distributions of S t and X t are the same for all t > 0.
13 SMILE CALIBRATION PROBLEM SOLVED? Corollary For a given strike K and maturity T, the LSV replicates exactly call option prices if and only if σ 2 (S T, T) E Q [V T S T = K] = σ 2 Dupire (K, T) 1. Pre-calibrate stochastic volatility parameters (κ, θ, ρ, ξ). 2. The calibration problem for vanillas is solved if we can compute E Q [V T S T = K] efficiently. 3. Iterative procedure to find σ. 4. Decoupled timestep-wise in Ren, Madan, & Qian (2007).
14 THE BARRIER OPTION CASE The price of an up-and-out call with strike K, barrier B and maturity T is where M t = max 0 u t S u. E Q [ (S T K) + 1 MT <B], Hence, market quotes contain information about the joint density of (S t, M t). Simultaneous calibration to both barriers and vanillas should give: More accuracy for exotics with barrier features (accumulators / auto-callables) A good estimation of the market implied spot-vol dynamics (excellent for cliquets / compounds) and vol-of-vol (ξ) Accurate sticky model adapted Greeks (from the pricing PDE grid)
15 MIMICKING AN ITÔ PROCESS Recall ds t S t = (r q) dt + α t dw t. Definition The Markovian projection of α 2 t onto (S t, M t) is [ ] σ 2 S,M (K, B, t) = E Q αt 2 S t = K M t = B. Theorem (Brunick and Shreve (2013)) There exists a weak solution X t to the SDE { dxt X t M X t = (r q) dt + σ S,M ( Xt, M X t, t ) dw t = max 0 u t X u such that the joint distributions of (S t, M t) and ( ) X t, M X t are the same for all t > 0.
16 PROBLEM Assume: ds t S t = (r q) dt + α t dw t Gyöngy σ 2 S (K, t) = E Q [ α 2 t S t = K ] = Dupire C (r q)(c K C T K ) 1 2 K2 2 C K 2 σ 2 S,M (K, B, t) = E [ Q αt 2 S t = K M t = B ] =? Brunick& Shreve Is there a Dupire-type formula for Barrier Options?
17 OUTLINE Introduction Derivative Pricing Models Markovian Projections Dupire-Type Formula for Barrier Options Main Result Dupire-type Formula Forward PIDE for Barrier Options Numerical Approximation Monte Carlo Exotics Pricing Under SLV
18 MAIN RESULT Recall the Dupire formula for European calls: C (K, T) T = 1 2 σ2 S (K, T) K 2 2 C (K, T) K 2 (r = q = 0 is assumed for readability. Two extra terms appear otherwise.) Theorem (Hambly, Mariapragassam and R. (2014)) For any strike K, barrier B and maturity T 2 C(K,B,T) B T = 1 2 ( 1 2 σ2 S,M (K, B, T) K 2 3 C(K,B,T) K 2 B (B K) + B 2 σ S,M 2 (B,B,T) 3 C(K,b,T) K 2 b K=B,b=B. B ) Proof. Mainly relies on Trotter-Meyer theorem and properties of local times. Alternatively, use PDE techniques.
19 WHAT THE EQUATION DOES AND DOES NOT BRING It links the Markovian projection to the market prices of Barrier options. It gives existence and uniqueness of the mimicking coefficient given a continuum of quotes. Problems to solve: Markovian projection involved at two strike levels, σ 2 S,M (K, B, T) and σ 2 S,M (B, B, T) How to retrieve σ 2 S,M from market quotes? There is a fourth order derivative involved potentially strong numerical instabilities. C ( B, B, T) might be hard to retrieve from the market.
20 OUTLINE Introduction Derivative Pricing Models Markovian Projections Dupire-Type Formula for Barrier Options Main Result Dupire-type Formula Forward PIDE for Barrier Options Numerical Approximation Monte Carlo Exotics Pricing Under SLV
21 DUPIRE-TYPE FORMULA Corollary The unique Brunick-Shreve mimicking coefficient for up-and-out call options is: σ Brunick (K, B, T) = 2 C(K,B,T) B T K B 2 C(0,B,T) T 1 2 K2 3 C(K,B,T) K 2 B (B K) 2 C(0,B,T) B T B where C (0, B, T) = E Dom [S T 1 MT <B] = S 0Q For (M T < B) is the price of the foreign no-touch (quoted on FX market).
22 HOW TO USE THE MODEL We do not believe in the projection á la Brunick-Shreve as a model, i.e., we do not postulate a dynamics of the form ds t S t = r (t) dt + σ Brunick (S t, M t, t) dw t (but see, e.g., Guyon 2014). Rather, we see σ Brunick as a code book for barrier prices, in the spirit of the dynamic local vol of Carmona and Nadtochiy (2009).
23 HOW TO USE THE MODEL We do not believe in the projection á la Brunick-Shreve as a model, i.e., we do not postulate a dynamics of the form ds t S t = r (t) dt + σ Brunick (S t, M t, t) dw t (but see, e.g., Guyon 2014). Rather, we see σ Brunick as a code book for barrier prices, in the spirit of the dynamic local vol of Carmona and Nadtochiy (2009). The LSV model as defined is under parametrized : We can only play with (κ, θ, ρ, ξ) since σ is fully determined by the vanilla prices. Considerations: Local stochastic vol parameters, parametric, as: Quotes of Barrier/Touch options on the market are scarce. For Touches: 5 Barrier levels, 10 maturities up to 3 years. Existence and uniqueness of the solution?
24 OUTLINE Introduction Derivative Pricing Models Markovian Projections Dupire-Type Formula for Barrier Options Main Result Dupire-type Formula Forward PIDE for Barrier Options Numerical Approximation Monte Carlo Exotics Pricing Under SLV
25 FORWARD PIDE Corollary The up-and-out call price follows a Volterra-type PIDE expressed as an IBVP: C (K, B, T) T = 1 2 σ2 S,M (K, B, T) K 2 2 C (K, B, T) K σ2 S,M (B, B, T) B 2 (B K) 3 C (B, B, T) K 2 B B 1 2 C (K, b, T) σ 2 S 0 K 2 K2 S,M (K, b, T) db. K 2 b C (K, B, 0) = (S 0 K) + 1 S0 <B T = 0 C (B, B, T) = 0 K = B C (K, S 0, T) = 0 B = S 0
26 OUTLINE Introduction Derivative Pricing Models Markovian Projections Dupire-Type Formula for Barrier Options Main Result Dupire-type Formula Forward PIDE for Barrier Options Numerical Approximation Monte Carlo Exotics Pricing Under SLV
27 A FULL-TRUNCATION EULER SCHEME Consider where dw t, dw V t = ρdt. ds t S t = (r q) dt + σ (S t, t) V t dw t, dv t = κ (θ v t) dt + ξ V t dw v t, 1. Approximate V t as in Lord et al (2010), by V tn+1 = V tn + κ(θ V + t n )(t n+1 t n) + ξ V + t n (Wt v n+1 Wt v n ), V t = V tn, t (t n, t n+1 ), where y + = max(y, 0). 2. Then define, for piecewise (in t) constant σ, t t S t = S 0 + (r q)s u du + σ(s u, u) V us u dw u. 0 0
28 CONVERGENCE Consider a (potentially path-dedependent) option pay-off f and U = E [exp( rt)f (S)], [ ] U = E exp( rt)f (S). Theorem (Cozma and R. (2015)) Assume σ Lipschitz with 0 sup S,t σ(s, t) σ max <. Then the approximations to the following option values converge as δt 0: 1. European puts, up-and-out calls, and any barrier puts; 2. if, additionally, k > ξ max(1, ξt/4), then also European calls, Asian options, down-and-in/out and up-and-in barrier calls etc. Extends to stochastic (CIR) rates. For variance reduction see A. Cozma poster.
29 CONCLUSION Used Markovian projection for calibration to barrier options; Derived Dupire-type formula for barriers, Forward PIDE for barrier / touch options; Monte Carlo scheme for exotics Next steps: Solution of Fokker-Planck equation for (St, V t, M t ); Forward boot-strapping algorithm by maturity.
30 NUMERICAL SCHEME ) u 0.,j = ((S 0 K i ) + 1 S0 <Bj 0 i N u 0.,0 = 0 f ṃ,0 = 0 for ( j = 0 ; j P ; j + +) * solve B j layer PDE for ( ) u ṃ,j : 0 m M δ T u m i,j ( 1 2 σ 2 S,M ( ) ) ( ) 1 σ 2 S,M Ki, B j, T m Ki, B j, T m B Ki 2 δ KK u m i,j 2 B σ2 S,M ( Bj, B j, T m ) B 2 j ( Bj K )+ δ KKBu m n j,j j 1 1 = 2 K2 i δ KK u m σ 2 S,M (K i, B n, T m) i,j B n=1 B * compute RHS ṃ,j+1 from RHS ṃ,j and u ṃ,j (for j < P) end for
31 VALIDATION: FRAMEWORK We compare: 1. The Forward PIDE with one numerical solution for the whole set of deal parameters. 2. The Backward Feynman-Kac pricing PDE with as many solutions as sets of deal parameters. We use: S 0 = 100, r d = 10% and the dividend yield is r f = 5% space steps / 1000 time steps for the PIDE and PDE solution Compared prices for (K, B, T) covering the set [0, 120] [100, 120] {1} 120 points in strike / 40 points in barrier levels.
32 VALIDATION: FRAMEWORK The Brunick volatility we use is arbitrary and defined using an SVI parametrisation (Gatheral (2006)). Figure: Brunick-Shreve Volatility Surface, a = 0.04, b = 0.2, σ = 0.2, ρ = m = 0 Brunick Volatility Surface Year 0.5 Year 1 Year Volatility Barrier Strike
33 VALIDATION Figure: Forward PIDE vs Backward PDE: S=100 and T=1Y
34 VALIDATION Strike Forward Backward Rel. PIDE PDE Diff e e e e e e e e e e e e e e
Calibration Lecture 4: LSV and Model Uncertainty
Calibration Lecture 4: LSV and Model Uncertainty March 2017 Recap: Heston model Recall the Heston stochastic volatility model ds t = rs t dt + Y t S t dw 1 t, dy t = κ(θ Y t ) dt + ξ Y t dw 2 t, where
More informationHeston Stochastic Local Volatility Model
Heston Stochastic Local Volatility Model Klaus Spanderen 1 R/Finance 2016 University of Illinois, Chicago May 20-21, 2016 1 Joint work with Johannes Göttker-Schnetmann Klaus Spanderen Heston Stochastic
More informationarxiv:submit/ [q-fin.mf] 13 Nov 2014
A FORWARD EQUATION FOR BARRIER OPTIONS UNDER THE BRUNICK&SHREVE MARKOVIAN PROJECTION BEN HAMBLY, MATTHIEU MARIAPRAGASSAM & CHRISTOPH REISINGER arxiv:submit/11139 [q-fin.mf] 13 Nov 214 Abstract. We derive
More informationConstructing Markov models for barrier options
Constructing Markov models for barrier options Gerard Brunick joint work with Steven Shreve Department of Mathematics University of Texas at Austin Nov. 14 th, 2009 3 rd Western Conference on Mathematical
More informationPricing Barrier Options under Local Volatility
Abstract Pricing Barrier Options under Local Volatility Artur Sepp Mail: artursepp@hotmail.com, Web: www.hot.ee/seppar 16 November 2002 We study pricing under the local volatility. Our research is mainly
More information"Pricing Exotic Options using Strong Convergence Properties
Fourth Oxford / Princeton Workshop on Financial Mathematics "Pricing Exotic Options using Strong Convergence Properties Klaus E. Schmitz Abe schmitz@maths.ox.ac.uk www.maths.ox.ac.uk/~schmitz Prof. Mike
More informationLocal Volatility Dynamic Models
René Carmona Bendheim Center for Finance Department of Operations Research & Financial Engineering Princeton University Columbia November 9, 27 Contents Joint work with Sergey Nadtochyi Motivation 1 Understanding
More informationFX Smile Modelling. 9 September September 9, 2008
FX Smile Modelling 9 September 008 September 9, 008 Contents 1 FX Implied Volatility 1 Interpolation.1 Parametrisation............................. Pure Interpolation.......................... Abstract
More informationMultilevel Monte Carlo Simulation
Multilevel Monte Carlo p. 1/48 Multilevel Monte Carlo Simulation Mike Giles mike.giles@maths.ox.ac.uk Oxford University Mathematical Institute Oxford-Man Institute of Quantitative Finance Workshop on Computational
More informationLocal vs Non-local Forward Equations for Option Pricing
Local vs Non-local Forward Equations for Option Pricing Rama Cont Yu Gu Abstract When the underlying asset is a continuous martingale, call option prices solve the Dupire equation, a forward parabolic
More informationTangent Lévy Models. Sergey Nadtochiy (joint work with René Carmona) Oxford-Man Institute of Quantitative Finance University of Oxford.
Tangent Lévy Models Sergey Nadtochiy (joint work with René Carmona) Oxford-Man Institute of Quantitative Finance University of Oxford June 24, 2010 6th World Congress of the Bachelier Finance Society Sergey
More informationExtrapolation analytics for Dupire s local volatility
Extrapolation analytics for Dupire s local volatility Stefan Gerhold (joint work with P. Friz and S. De Marco) Vienna University of Technology, Austria 6ECM, July 2012 Implied vol and local vol Implied
More informationDefinition Pricing Risk management Second generation barrier options. Barrier Options. Arfima Financial Solutions
Arfima Financial Solutions Contents Definition 1 Definition 2 3 4 Contenido Definition 1 Definition 2 3 4 Definition Definition: A barrier option is an option on the underlying asset that is activated
More informationHedging under Model Uncertainty
Hedging under Model Uncertainty Efficient Computation of the Hedging Error using the POD 6th World Congress of the Bachelier Finance Society June, 24th 2010 M. Monoyios, T. Schröter, Oxford University
More informationCONTINUOUS TIME PRICING AND TRADING: A REVIEW, WITH SOME EXTRA PIECES
CONTINUOUS TIME PRICING AND TRADING: A REVIEW, WITH SOME EXTRA PIECES THE SOURCE OF A PRICE IS ALWAYS A TRADING STRATEGY SPECIAL CASES WHERE TRADING STRATEGY IS INDEPENDENT OF PROBABILITY MEASURE COMPLETENESS,
More informationMonte Carlo Methods for Uncertainty Quantification
Monte Carlo Methods for Uncertainty Quantification Mike Giles Mathematical Institute, University of Oxford Contemporary Numerical Techniques Mike Giles (Oxford) Monte Carlo methods 2 1 / 24 Lecture outline
More informationAn Analytical Approximation for Pricing VWAP Options
.... An Analytical Approximation for Pricing VWAP Options Hideharu Funahashi and Masaaki Kijima Graduate School of Social Sciences, Tokyo Metropolitan University September 4, 215 Kijima (TMU Pricing of
More informationAMH4 - ADVANCED OPTION PRICING. Contents
AMH4 - ADVANCED OPTION PRICING ANDREW TULLOCH Contents 1. Theory of Option Pricing 2 2. Black-Scholes PDE Method 4 3. Martingale method 4 4. Monte Carlo methods 5 4.1. Method of antithetic variances 5
More informationThe stochastic calculus
Gdansk A schedule of the lecture Stochastic differential equations Ito calculus, Ito process Ornstein - Uhlenbeck (OU) process Heston model Stopping time for OU process Stochastic differential equations
More informationHeston vs Heston. Antoine Jacquier. Department of Mathematics, Imperial College London. ICASQF, Cartagena, Colombia, June 2016
Department of Mathematics, Imperial College London ICASQF, Cartagena, Colombia, June 2016 - Joint work with Fangwei Shi June 18, 2016 Implied volatility About models Calibration Implied volatility Asset
More informationSimple Robust Hedging with Nearby Contracts
Simple Robust Hedging with Nearby Contracts Liuren Wu and Jingyi Zhu Baruch College and University of Utah October 22, 2 at Worcester Polytechnic Institute Wu & Zhu (Baruch & Utah) Robust Hedging with
More informationLocal Variance Gamma Option Pricing Model
Local Variance Gamma Option Pricing Model Peter Carr at Courant Institute/Morgan Stanley Joint work with Liuren Wu June 11, 2010 Carr (MS/NYU) Local Variance Gamma June 11, 2010 1 / 29 1 Automated Option
More informationEconomic Scenario Generator: Applications in Enterprise Risk Management. Ping Sun Executive Director, Financial Engineering Numerix LLC
Economic Scenario Generator: Applications in Enterprise Risk Management Ping Sun Executive Director, Financial Engineering Numerix LLC Numerix makes no representation or warranties in relation to information
More informationOn VIX Futures in the rough Bergomi model
On VIX Futures in the rough Bergomi model Oberwolfach Research Institute for Mathematics, February 28, 2017 joint work with Antoine Jacquier and Claude Martini Contents VIX future dynamics under rbergomi
More informationExploring Volatility Derivatives: New Advances in Modelling. Bruno Dupire Bloomberg L.P. NY
Exploring Volatility Derivatives: New Advances in Modelling Bruno Dupire Bloomberg L.P. NY bdupire@bloomberg.net Global Derivatives 2005, Paris May 25, 2005 1. Volatility Products Historical Volatility
More informationPricing Variance Swaps under Stochastic Volatility Model with Regime Switching - Discrete Observations Case
Pricing Variance Swaps under Stochastic Volatility Model with Regime Switching - Discrete Observations Case Guang-Hua Lian Collaboration with Robert Elliott University of Adelaide Feb. 2, 2011 Robert Elliott,
More informationPricing of a European Call Option Under a Local Volatility Interbank Offered Rate Model
American Journal of Theoretical and Applied Statistics 2018; 7(2): 80-84 http://www.sciencepublishinggroup.com/j/ajtas doi: 10.11648/j.ajtas.20180702.14 ISSN: 2326-8999 (Print); ISSN: 2326-9006 (Online)
More informationCalibrating Financial Models Using Consistent Bayesian Estimators
Calibrating Financial Models Using Consistent Bayesian Estimators Christoph Reisinger Joint work with Alok Gupta June 25, 2010 Example model uncertainty A local volatility model, jump diffusion model,
More informationOptimal robust bounds for variance options and asymptotically extreme models
Optimal robust bounds for variance options and asymptotically extreme models Alexander Cox 1 Jiajie Wang 2 1 University of Bath 2 Università di Roma La Sapienza Advances in Financial Mathematics, 9th January,
More informationSimple Robust Hedging with Nearby Contracts
Simple Robust Hedging with Nearby Contracts Liuren Wu and Jingyi Zhu Baruch College and University of Utah April 29, 211 Fourth Annual Triple Crown Conference Liuren Wu (Baruch) Robust Hedging with Nearby
More informationComputer Exercise 2 Simulation
Lund University with Lund Institute of Technology Valuation of Derivative Assets Centre for Mathematical Sciences, Mathematical Statistics Fall 2017 Computer Exercise 2 Simulation This lab deals with pricing
More informationFinancial Mathematics and Supercomputing
GPU acceleration in early-exercise option valuation Álvaro Leitao and Cornelis W. Oosterlee Financial Mathematics and Supercomputing A Coruña - September 26, 2018 Á. Leitao & Kees Oosterlee SGBM on GPU
More informationAdvanced Topics in Derivative Pricing Models. Topic 4 - Variance products and volatility derivatives
Advanced Topics in Derivative Pricing Models Topic 4 - Variance products and volatility derivatives 4.1 Volatility trading and replication of variance swaps 4.2 Volatility swaps 4.3 Pricing of discrete
More informationLocal Volatility Pricing Models for Long-Dated FX Derivatives
Local Volatility Pricing Models for Long-Dated FX Derivatives G. Deelstra, G. Rayee Université Libre de Bruxelles grayee@ulb.ac.be Gregory Rayee (ULB) Bachelier Congress 2010 Toronto, 22-26 june 2010 1
More informationFE610 Stochastic Calculus for Financial Engineers. Stevens Institute of Technology
FE610 Stochastic Calculus for Financial Engineers Lecture 13. The Black-Scholes PDE Steve Yang Stevens Institute of Technology 04/25/2013 Outline 1 The Black-Scholes PDE 2 PDEs in Asset Pricing 3 Exotic
More informationEFFICIENT MONTE CARLO ALGORITHM FOR PRICING BARRIER OPTIONS
Commun. Korean Math. Soc. 23 (2008), No. 2, pp. 285 294 EFFICIENT MONTE CARLO ALGORITHM FOR PRICING BARRIER OPTIONS Kyoung-Sook Moon Reprinted from the Communications of the Korean Mathematical Society
More informationMonte Carlo Simulations
Monte Carlo Simulations Lecture 1 December 7, 2014 Outline Monte Carlo Methods Monte Carlo methods simulate the random behavior underlying the financial models Remember: When pricing you must simulate
More informationHeinz W. Engl. Industrial Mathematics Institute Johannes Kepler Universität Linz, Austria
Some Identification Problems in Finance Heinz W. Engl Industrial Mathematics Institute Johannes Kepler Universität Linz, Austria www.indmath.uni-linz.ac.at Johann Radon Institute for Computational and
More informationPricing with a Smile. Bruno Dupire. Bloomberg
CP-Bruno Dupire.qxd 10/08/04 6:38 PM Page 1 11 Pricing with a Smile Bruno Dupire Bloomberg The Black Scholes model (see Black and Scholes, 1973) gives options prices as a function of volatility. If an
More informationApproximation Methods in Derivatives Pricing
Approximation Methods in Derivatives Pricing Minqiang Li Bloomberg LP September 24, 2013 1 / 27 Outline of the talk A brief overview of approximation methods Timer option price approximation Perpetual
More informationCash Accumulation Strategy based on Optimal Replication of Random Claims with Ordinary Integrals
arxiv:1711.1756v1 [q-fin.mf] 6 Nov 217 Cash Accumulation Strategy based on Optimal Replication of Random Claims with Ordinary Integrals Renko Siebols This paper presents a numerical model to solve the
More informationConvergence Analysis of Monte Carlo Calibration of Financial Market Models
Analysis of Monte Carlo Calibration of Financial Market Models Christoph Käbe Universität Trier Workshop on PDE Constrained Optimization of Certain and Uncertain Processes June 03, 2009 Monte Carlo Calibration
More informationEconomathematics. Problem Sheet 1. Zbigniew Palmowski. Ws 2 dw s = 1 t
Economathematics Problem Sheet 1 Zbigniew Palmowski 1. Calculate Ee X where X is a gaussian random variable with mean µ and volatility σ >.. Verify that where W is a Wiener process. Ws dw s = 1 3 W t 3
More informationCalibration Lecture 1: Background and Parametric Models
Calibration Lecture 1: Background and Parametric Models March 2016 Motivation What is calibration? Derivative pricing models depend on parameters: Black-Scholes σ, interest rate r, Heston reversion speed
More informationComputer Exercise 2 Simulation
Lund University with Lund Institute of Technology Valuation of Derivative Assets Centre for Mathematical Sciences, Mathematical Statistics Spring 2010 Computer Exercise 2 Simulation This lab deals with
More informationDevelopments in Volatility Derivatives Pricing
Developments in Volatility Derivatives Pricing Jim Gatheral Global Derivatives 2007 Paris, May 23, 2007 Motivation We would like to be able to price consistently at least 1 options on SPX 2 options on
More informationM5MF6. Advanced Methods in Derivatives Pricing
Course: Setter: M5MF6 Dr Antoine Jacquier MSc EXAMINATIONS IN MATHEMATICS AND FINANCE DEPARTMENT OF MATHEMATICS April 2016 M5MF6 Advanced Methods in Derivatives Pricing Setter s signature...........................................
More informationEquity correlations implied by index options: estimation and model uncertainty analysis
1/18 : estimation and model analysis, EDHEC Business School (joint work with Rama COT) Modeling and managing financial risks Paris, 10 13 January 2011 2/18 Outline 1 2 of multi-asset models Solution to
More informationKing s College London
King s College London University Of London This paper is part of an examination of the College counting towards the award of a degree. Examinations are governed by the College Regulations under the authority
More information1.1 Basic Financial Derivatives: Forward Contracts and Options
Chapter 1 Preliminaries 1.1 Basic Financial Derivatives: Forward Contracts and Options A derivative is a financial instrument whose value depends on the values of other, more basic underlying variables
More informationRobust Pricing and Hedging of Options on Variance
Robust Pricing and Hedging of Options on Variance Alexander Cox Jiajie Wang University of Bath Bachelier 21, Toronto Financial Setting Option priced on an underlying asset S t Dynamics of S t unspecified,
More informationThe Use of Importance Sampling to Speed Up Stochastic Volatility Simulations
The Use of Importance Sampling to Speed Up Stochastic Volatility Simulations Stan Stilger June 6, 1 Fouque and Tullie use importance sampling for variance reduction in stochastic volatility simulations.
More informationAN ANALYTICALLY TRACTABLE UNCERTAIN VOLATILITY MODEL
AN ANALYTICALLY TRACTABLE UNCERTAIN VOLATILITY MODEL FABIO MERCURIO BANCA IMI, MILAN http://www.fabiomercurio.it 1 Stylized facts Traders use the Black-Scholes formula to price plain-vanilla options. An
More informationEuropean option pricing under parameter uncertainty
European option pricing under parameter uncertainty Martin Jönsson (joint work with Samuel Cohen) University of Oxford Workshop on BSDEs, SPDEs and their Applications July 4, 2017 Introduction 2/29 Introduction
More informationThe Evaluation of American Compound Option Prices under Stochastic Volatility. Carl Chiarella and Boda Kang
The Evaluation of American Compound Option Prices under Stochastic Volatility Carl Chiarella and Boda Kang School of Finance and Economics University of Technology, Sydney CNR-IMATI Finance Day Wednesday,
More informationRough volatility models: When population processes become a new tool for trading and risk management
Rough volatility models: When population processes become a new tool for trading and risk management Omar El Euch and Mathieu Rosenbaum École Polytechnique 4 October 2017 Omar El Euch and Mathieu Rosenbaum
More informationSample Path Large Deviations and Optimal Importance Sampling for Stochastic Volatility Models
Sample Path Large Deviations and Optimal Importance Sampling for Stochastic Volatility Models Scott Robertson Carnegie Mellon University scottrob@andrew.cmu.edu http://www.math.cmu.edu/users/scottrob June
More informationMarkovian Projection, Heston Model and Pricing of European Basket Optio
Markovian Projection, Heston Model and Pricing of European Basket Options with Smile July 7, 2009 European Options on geometric baskets European Options on arithmetic baskets Pricing via Moment Matching
More informationMATH3075/3975 FINANCIAL MATHEMATICS TUTORIAL PROBLEMS
MATH307/37 FINANCIAL MATHEMATICS TUTORIAL PROBLEMS School of Mathematics and Statistics Semester, 04 Tutorial problems should be used to test your mathematical skills and understanding of the lecture material.
More informationMultiscale Stochastic Volatility Models Heston 1.5
Multiscale Stochastic Volatility Models Heston 1.5 Jean-Pierre Fouque Department of Statistics & Applied Probability University of California Santa Barbara Modeling and Managing Financial Risks Paris,
More informationIEOR E4703: Monte-Carlo Simulation
IEOR E4703: Monte-Carlo Simulation Simulating Stochastic Differential Equations Martin Haugh Department of Industrial Engineering and Operations Research Columbia University Email: martin.b.haugh@gmail.com
More informationAnumericalalgorithm for general HJB equations : a jump-constrained BSDE approach
Anumericalalgorithm for general HJB equations : a jump-constrained BSDE approach Nicolas Langrené Univ. Paris Diderot - Sorbonne Paris Cité, LPMA, FiME Joint work with Idris Kharroubi (Paris Dauphine),
More informationManaging the Newest Derivatives Risks
Managing the Newest Derivatives Risks Michel Crouhy IXIS Corporate and Investment Bank / A subsidiary of NATIXIS Derivatives 2007: New Ideas, New Instruments, New markets NYU Stern School of Business,
More informationNumerical schemes for SDEs
Lecture 5 Numerical schemes for SDEs Lecture Notes by Jan Palczewski Computational Finance p. 1 A Stochastic Differential Equation (SDE) is an object of the following type dx t = a(t,x t )dt + b(t,x t
More informationThe Black-Scholes Model
IEOR E4706: Foundations of Financial Engineering c 2016 by Martin Haugh The Black-Scholes Model In these notes we will use Itô s Lemma and a replicating argument to derive the famous Black-Scholes formula
More informationRecovering portfolio default intensities implied by CDO quotes. Rama CONT & Andreea MINCA. March 1, Premia 14
Recovering portfolio default intensities implied by CDO quotes Rama CONT & Andreea MINCA March 1, 2012 1 Introduction Premia 14 Top-down" models for portfolio credit derivatives have been introduced as
More informationPricing and hedging with rough-heston models
Pricing and hedging with rough-heston models Omar El Euch, Mathieu Rosenbaum Ecole Polytechnique 1 January 216 El Euch, Rosenbaum Pricing and hedging with rough-heston models 1 Table of contents Introduction
More informationOptimal Hedging of Variance Derivatives. John Crosby. Centre for Economic and Financial Studies, Department of Economics, Glasgow University
Optimal Hedging of Variance Derivatives John Crosby Centre for Economic and Financial Studies, Department of Economics, Glasgow University Presentation at Baruch College, in New York, 16th November 2010
More informationPricing Long-Dated Equity Derivatives under Stochastic Interest Rates
Pricing Long-Dated Equity Derivatives under Stochastic Interest Rates Navin Ranasinghe Submitted in total fulfillment of the requirements of the degree of Doctor of Philosophy December, 216 Centre for
More informationYield to maturity modelling and a Monte Carlo Technique for pricing Derivatives on Constant Maturity Treasury (CMT) and Derivatives on forward Bonds
Yield to maturity modelling and a Monte Carlo echnique for pricing Derivatives on Constant Maturity reasury (CM) and Derivatives on forward Bonds Didier Kouokap Youmbi o cite this version: Didier Kouokap
More informationLarge Deviations and Stochastic Volatility with Jumps: Asymptotic Implied Volatility for Affine Models
Large Deviations and Stochastic Volatility with Jumps: TU Berlin with A. Jaquier and A. Mijatović (Imperial College London) SIAM conference on Financial Mathematics, Minneapolis, MN July 10, 2012 Implied
More informationAD in Monte Carlo for finance
AD in Monte Carlo for finance Mike Giles giles@comlab.ox.ac.uk Oxford University Computing Laboratory AD & Monte Carlo p. 1/30 Overview overview of computational finance stochastic o.d.e. s Monte Carlo
More informationVariance Derivatives and the Effect of Jumps on Them
Eötvös Loránd University Corvinus University of Budapest Variance Derivatives and the Effect of Jumps on Them MSc Thesis Zsófia Tagscherer MSc in Actuarial and Financial Mathematics Faculty of Quantitative
More informationIlliquidity, Credit risk and Merton s model
Illiquidity, Credit risk and Merton s model (joint work with J. Dong and L. Korobenko) A. Deniz Sezer University of Calgary April 28, 2016 Merton s model of corporate debt A corporate bond is a contingent
More informationBeyond Black-Scholes
IEOR E477: Financial Engineering: Continuous-Time Models Fall 21 c 21 by Martin Haugh Beyond Black-Scholes These notes provide an introduction to some of the models that have been proposed as replacements
More informationCalculating Implied Volatility
Statistical Laboratory University of Cambridge University of Cambridge Mathematics and Big Data Showcase 20 April 2016 How much is an option worth? A call option is the right, but not the obligation, to
More informationVega Maps: Predicting Premium Change from Movements of the Whole Volatility Surface
Vega Maps: Predicting Premium Change from Movements of the Whole Volatility Surface Ignacio Hoyos Senior Quantitative Analyst Equity Model Validation Group Risk Methodology Santander Alberto Elices Head
More informationContinuous Time Finance. Tomas Björk
Continuous Time Finance Tomas Björk 1 II Stochastic Calculus Tomas Björk 2 Typical Setup Take as given the market price process, S(t), of some underlying asset. S(t) = price, at t, per unit of underlying
More informationInterest Rate Volatility
Interest Rate Volatility III. Working with SABR Andrew Lesniewski Baruch College and Posnania Inc First Baruch Volatility Workshop New York June 16-18, 2015 Outline Arbitrage free SABR 1 Arbitrage free
More informationSTOCHASTIC VOLATILITY MODELS: CALIBRATION, PRICING AND HEDGING. Warrick Poklewski-Koziell
STOCHASTIC VOLATILITY MODELS: CALIBRATION, PRICING AND HEDGING by Warrick Poklewski-Koziell Programme in Advanced Mathematics of Finance School of Computational and Applied Mathematics University of the
More informationPractical example of an Economic Scenario Generator
Practical example of an Economic Scenario Generator Martin Schenk Actuarial & Insurance Solutions SAV 7 March 2014 Agenda Introduction Deterministic vs. stochastic approach Mathematical model Application
More informationA Brief Introduction to Stochastic Volatility Modeling
A Brief Introduction to Stochastic Volatility Modeling Paul J. Atzberger General comments or corrections should be sent to: paulatz@cims.nyu.edu Introduction When using the Black-Scholes-Merton model to
More informationStochastic Volatility (Working Draft I)
Stochastic Volatility (Working Draft I) Paul J. Atzberger General comments or corrections should be sent to: paulatz@cims.nyu.edu 1 Introduction When using the Black-Scholes-Merton model to price derivative
More informationMultiscale Stochastic Volatility Models
Multiscale Stochastic Volatility Models Jean-Pierre Fouque University of California Santa Barbara 6th World Congress of the Bachelier Finance Society Toronto, June 25, 2010 Multiscale Stochastic Volatility
More informationValuation of Volatility Derivatives. Jim Gatheral Global Derivatives & Risk Management 2005 Paris May 24, 2005
Valuation of Volatility Derivatives Jim Gatheral Global Derivatives & Risk Management 005 Paris May 4, 005 he opinions expressed in this presentation are those of the author alone, and do not necessarily
More informationLecture 8: The Black-Scholes theory
Lecture 8: The Black-Scholes theory Dr. Roman V Belavkin MSO4112 Contents 1 Geometric Brownian motion 1 2 The Black-Scholes pricing 2 3 The Black-Scholes equation 3 References 5 1 Geometric Brownian motion
More informationOPTION PRICE WHEN THE STOCK IS A SEMIMARTINGALE
DOI: 1.1214/ECP.v7-149 Elect. Comm. in Probab. 7 (22) 79 83 ELECTRONIC COMMUNICATIONS in PROBABILITY OPTION PRICE WHEN THE STOCK IS A SEMIMARTINGALE FIMA KLEBANER Department of Mathematics & Statistics,
More informationAnalytical formulas for local volatility model with stochastic. Mohammed Miri
Analytical formulas for local volatility model with stochastic rates Mohammed Miri Joint work with Eric Benhamou (Pricing Partners) and Emmanuel Gobet (Ecole Polytechnique Modeling and Managing Financial
More informationIEOR E4602: Quantitative Risk Management Spring 2016 c 2016 by Martin Haugh. Model Risk
IEOR E4602: Quantitative Risk Management Spring 2016 c 2016 by Martin Haugh Model Risk We discuss model risk in these notes, mainly by way of example. We emphasize (i) the importance of understanding the
More informationYoungrok Lee and Jaesung Lee
orean J. Math. 3 015, No. 1, pp. 81 91 http://dx.doi.org/10.11568/kjm.015.3.1.81 LOCAL VOLATILITY FOR QUANTO OPTION PRICES WITH STOCHASTIC INTEREST RATES Youngrok Lee and Jaesung Lee Abstract. This paper
More informationVolatility Smiles and Yield Frowns
Volatility Smiles and Yield Frowns Peter Carr NYU CBOE Conference on Derivatives and Volatility, Chicago, Nov. 10, 2017 Peter Carr (NYU) Volatility Smiles and Yield Frowns 11/10/2017 1 / 33 Interest Rates
More informationFX Barrien Options. A Comprehensive Guide for Industry Quants. Zareer Dadachanji Director, Model Quant Solutions, Bremen, Germany
FX Barrien Options A Comprehensive Guide for Industry Quants Zareer Dadachanji Director, Model Quant Solutions, Bremen, Germany Contents List of Figures List of Tables Preface Acknowledgements Foreword
More informationFrom Discrete Time to Continuous Time Modeling
From Discrete Time to Continuous Time Modeling Prof. S. Jaimungal, Department of Statistics, University of Toronto 2004 Arrow-Debreu Securities 2004 Prof. S. Jaimungal 2 Consider a simple one-period economy
More informationA Consistent Pricing Model for Index Options and Volatility Derivatives
A Consistent Pricing Model for Index Options and Volatility Derivatives 6th World Congress of the Bachelier Society Thomas Kokholm Finance Research Group Department of Business Studies Aarhus School of
More informationVolatility Trading Strategies: Dynamic Hedging via A Simulation
Volatility Trading Strategies: Dynamic Hedging via A Simulation Approach Antai Collage of Economics and Management Shanghai Jiao Tong University Advisor: Professor Hai Lan June 6, 2017 Outline 1 The volatility
More informationShort-time-to-expiry expansion for a digital European put option under the CEV model. November 1, 2017
Short-time-to-expiry expansion for a digital European put option under the CEV model November 1, 2017 Abstract In this paper I present a short-time-to-expiry asymptotic series expansion for a digital European
More informationApplication of Moment Expansion Method to Option Square Root Model
Application of Moment Expansion Method to Option Square Root Model Yun Zhou Advisor: Professor Steve Heston University of Maryland May 5, 2009 1 / 19 Motivation Black-Scholes Model successfully explain
More informationInvestigation of Dependency between Short Rate and Transition Rate on Pension Buy-outs. Arık, A. 1 Yolcu-Okur, Y. 2 Uğur Ö. 2
Investigation of Dependency between Short Rate and Transition Rate on Pension Buy-outs Arık, A. 1 Yolcu-Okur, Y. 2 Uğur Ö. 2 1 Hacettepe University Department of Actuarial Sciences 06800, TURKEY 2 Middle
More informationParameter sensitivity of CIR process
Parameter sensitivity of CIR process Sidi Mohamed Ould Aly To cite this version: Sidi Mohamed Ould Aly. Parameter sensitivity of CIR process. Electronic Communications in Probability, Institute of Mathematical
More informationAn Overview of Volatility Derivatives and Recent Developments
An Overview of Volatility Derivatives and Recent Developments September 17th, 2013 Zhenyu Cui Math Club Colloquium Department of Mathematics Brooklyn College, CUNY Math Club Colloquium Volatility Derivatives
More information