Technical paper
Substitute hedging
Derivatives on assets that are difficult to trade are of growing importance. Pricing suchderivatives requires the use of utility theory and proxy assets for hedging. Here, VickyHenderson and David Hobson review the theory and discuss several topical…
Universal Barriers
As our survey in this issue shows, there is an increasing volume of barrier products traded in the forex options market. Here, Alexander Lipton and William McGhee discuss the pricing of barriers under various model frameworks, with particular focus on…
Credit risk in asset securitisations: an analytical model
How much capital should banks reserve against investments in portfolio securitisations? Asserting that recent proposals on this subject by Basel are inconsistent, Michael Pykhtin and Ashish Dev propose a new analytical model suitable for tranches of…
At the end of the tail
When fat tails are present, extreme value theory provides a framework for estimating value-at-risk at higher confidence levels with greater accuracy than traditional Var methods. Naveen Andrews and Mark Thomas explain
Honour your contribution
What is the best method for determining the risk contribution of a component in a portfolio? An exploration of the pros and cons of three important methods, showing that none dominates the others.
Mean-reverting smiles
Commodity markets such as crude oil exhibit mean reversion as well as option smiles. The authors construct a model suitable for pricing exotic options in these markets
Exotic spectra
Eigenfunction expansions can also be applied to finance. The method is particularly suited to barrier and Asian options, with convergence properties that compare favourably with Monte Carlo.
Globalisation and equity index exposure
Equity diversification
Inside insider trading
Securities regulators need techniques to detect insider trading if it occurs and determine the extent of possible sanctions. Here, the author proposes a new probabilistic methodology particularly suited to illiquid markets.
New products, new risks
Structured equity products marketed in Europe present considerable risk management challenges. The author shows the danger of using naive model-based approaches to price and hedge them.
Globalisation and equity index exposure
Does the global presence of large multinational companies diminish the diversification effect inequity portfolios? Gary Robinson argues that this is indeed the case, and suggests a remedy
Analytical approach to credit risk modelling
The increasing popularity of VAR-based credit portfolio risk models has led to a growing recognition that Monte Carlo techniques are inadequate for economic capital calculations. Here, Michael Pykhtin and Ashish Dev present a new analytical alternative…