Correlation
Now you PRDC them...
Power-reverse dual-currency notes proved a bonanza for dealers when markets were tame, but risk-managing the product has become a drain on resources and cash in recent years. As a result, some firms have decided to exit the market. Mark Pengelly…
Pricing and hedging basket credit derivatives in the Gaussian copula
The static assumptions of the Gaussian copula model have long presented an obstacle to dynamic hedging of credit portfolio tranches. Here, Jean-David Fermanian and Olivier Vigneron combine the copula with a spread diffusion to derive hedging error as…
Wrestling with correlation
The correlation risk inherent in most structured products represents an ongoing headache for manufacturers. While new regulatory proposals would affect how much risk banks keep on their books, market dynamics are at play, especially the rise in…
Big risk in Japan
RBS issued a one-year income product linked to five Japanese stocks in March 2008, paying 3% interest plus a variable capital repayment. Three of the stocks fell through their barriers, putting capital at risk and making for a capital return of only 39%
Crowd busting
The financial crisis revealed most dealers had near-identical exposures in exotic derivatives markets – whether in credit, interest rates, equity or inflation – leaving them unable to exit or hedge their positions when markets tanked. How have traders…
Correlation: Alternative realities
Correlation: Alternative realities
Factor models for credit correlation
Stewart Inglis, Alex Lipton and Artur Sepp present an extension of the static factor model for pricing credit correlation products introduced by Lipton (2006) and detailed in Inglis & Lipton (2007)
Hedging the hard way
Quanto options have stung dealers' equity derivatives books after the unexpected spikes in volatility and correlation that followed the Lehman Brothers collapse, while structured product issuers have been hit by plummeting dividend expectations and…
Stock responses
Exotics
Sunk by correlation
Equity Derivatives
Explaining the Levy base correlation smile
Joao Garcia and Serge Goossens look at base expected loss at maturity both in the Gaussian copula and Levy-based models, and link it to base correlation in these frameworks. They report on the existence of smile in both base correlation curves and…
Sunk by correlation
Equity derivatives dealers faced a grim picture across global markets earlier this year, with steep rises in correlation and volatility together with a slump in dividend expectations decimating exotic books. How have dealers responded? By Mark Pengelly
Room for skew
Skew