Interest rates
Interest Rate Derivatives House of the Year - Deutsche Bank
Risk Awards 2008
Combining the SABR and LMM models
Pierre Henry-Labordere analyses a stochastic volatility Libor market model that combines the SABR and Brace-Gatarek-Musiela (BGM) models in a natural way
A time-homogeneous, SABR-consistent extension of the LMM
Riccardo Rebonato proposes an extension of the Libor market model (LMM) that recovers the stochastic, alpha, beta, rho (SABR) caplet prices almost exactly for all strikes and maturities. The dynamics of the volatility are chosen so as to be consistent…
A time-homogeneous, SABR-consistent extension of the LMM
Riccardo Rebonato proposes an extension of the Libor market model (LMM) that recovers the SABR caplet prices almost exactly for all strikes and maturities. The dynamics of the volatility are chosen so as to be consistent across expiries, to be…
Modelling inflation
Lars Kjaergaard models inflation using a three-factor Gaussian method. This gives a simple description of derivatives linked to inflation and interest rates, and allows for fast evaluation. He then shows how the model can be calibrated
Calibrating and pricing with local volatility models
Cutting edge - Option pricing
Calibrating and pricing with embedded local volatility models
Consistently fitting vanilla option surfaces when pricing volatility derivatives such as Vix options or interest rate/equity hybrids is an important issue. Here, Yong Ren, Dilip Madan and Michael Qian Qian show how this can be accomplished, using a…
Modelling inflation
Lars Kjaergaard models inflation using a three-factor Gaussian method. This gives a simple description of derivatives linked to inflation and interest rates, and allows for fast evaluation. He then shows how the model can be calibrated
Modelling inflation
Lars Kjaergaard models inflation using a three-factor Gaussian method. This gives a simple description of derivatives linked to inflation and interest rates, and allows for fast evaluation. He then shows how the model can be calibrated
Valuing inflation futures contracts
In recent years, futures contracts written on inflation (specifically, on the ratio of the consumer price index (CPI) level at two different times) have been introduced. Working within the Jarrow & Yildirim (2003) model, John Crosby derives formulas for…
Excess yields in bond hedging
Litterman & Scheinkman (1991) showed that the term structure of interest rates is reliablymodelled by an affine three-factor model using principal component analysis. Such a modelis inconsistent with no arbitrage. Here, Haim Reisman and Gady Zohar derive…
Correlating market models
While swaption prices theoretically contain information on interest rate correlation, Bruce Choy, Tim Dun and Erik Schlögl argue that, for any practical purpose, this information cannot be extracted. Care must therefore be taken when pricing correlation…
DrKW adds to sales and trading in Paris
Dresdner Kleinwort Wasserstein (DrKW) has made a number of sales and trading appointments within its capital markets team in Paris.
Component proponents II
Christophe Pérignon and Christophe Villa propose a novel method of extracting the risk factors driving interest rates that allows both the covariance matrix of interest rates and the variances of the risk factors to vary through time. To illustrate the…
Swap vega in BGM: pitfalls and alternatives
Raoul Pietersz and Antoon PelsserPractitioners who are developing the Libor BGM model for risk management of a swap-based interest rate derivative be warned: for certain volatility functions the estimate of swap vega may be poor. This may occur for time…
Shadow interest
Using a Vasicek process for the shadow rate, Viatcheslav Gorovoi and Vadim Linetsky develop an analytical solution for pricing zero-coupon bonds using eigenfunction expansions, and show how to calibrate their model to the Japanese bond market. This…
Black smirks
Fei Zhou presents a simple stochastic volatility extension of the Black interest rate option pricing model widely used by traders. Using a perturbative expansion in volatility of volatility, he derives modified Black formulas that correctly fit the…
Sponsor's article > Redefining risk methodology horizons
Research has suggested that banks may need to address issues not clarified by Basel II and take a long, hard look at whether accepted approaches to evaluating credit risk are adequate. As part of its strategic forum series, SunGard's Panorama business…
The stochastic volatility Libor market model
Interest rates
The relativity of volatility
Stress testing
The essentials of the LMM
Interest rates
Forward thinking
Forward simulation