Technical paper/Options
Ten laws of operational risk
This paper sets out ten laws that govern the behavior of operational risk relating to the occurrence and detection/duration of events; the rapidity with which firms suffer losses; the lags in crystallization of losses; and internal and external drivers…
Semi-closed-form prices of barrier options in the Hull-White model
New pricer for options with time-dependent barrier shown to be computationally efficient and stable
Strangle to resuscitate: evidence from India
This study examines the performance of two strangle strategies at different legs to find the best strategy for consistent profit generation when trading on the Indian stock market index Nifty.
Finite difference schemes with exact recovery of vanilla option prices
A model unifies the classic local vol and binomial trees to accurately price options
Smaller drawdowns, higher average and risk-adjusted returns for equity portfolios, using options and power-log optimization based on a behavioral model of investor preferences
The authors use a power-log utility optimization algorithm based on a behavioral model of investor preferences, along with either a call or a put option overlay, to reverse the negative skewness of monthly Standard & Poor’s 500 (S&P 500) index returns…
An adaptive Monte Carlo approach
This paper proposes a new, flexible framework using Monte Carlo methods to price Parisian options not only with constant boundaries but also with general curved boundaries.
The SABR forward smile
Thomas Roos presents the expressions for the implied volatilities of European and forward starting options
The joint S&P 500/Vix smile calibration puzzle solved
SPX and Vix derivatives are modelled jointly in an arbitrage-free setting
Portfolio optimization for American options
In this paper, the authors construct strategies for an American option portfolio by exercising options at optimal timings with optimal weights determined concurrently.
A real option analysis on retiring existing coal-fired electricity plants in the United States
This paper looks at the conditions under which a reasonable green policy by a US state encourages the early replacement of existing coal plants with new natural gas plants.
Covering the world: global evidence on covered calls
Typical covered call strategies may be decomposed, using a risk and performance attribution methodology, into three components: equity exposure, short volatility exposure and equity timing. This paper applies that attribution methodology to covered calls…
Optimal equity protection of Solvency II regulated portfolios
In the context of equity investments, this paper examines the relationship between the cost of acquiring protection (in the form of put option) and the reduction of capital charges that it entails. The paper develops the idea that Solvency II regulations…
Enhancing enterprise value by trading options
This paper considers the problem of enhancing an investment activity by regularly adding an option trade to the portfolio mix and presented results for the single underlier of the S&P 500 index, with the underlying activity being either long the index or…
Robust option pricing with characteristic functions and the B-spline order of density projection
This paper extends and refines the method of option pricing by frame projection of risk-neutral densities to incorporate B-splines.
Local variance gamma revisited
In this paper, the authors propose a new method of constructing volatility surfaces for foreign exchange options.
A new nonlinear partial differential equation in finance and a method of its solution
In this paper, the author considers a special type of nonlinear PDE that arises by applying optimization to some financial problems.
Local volatility models in commodity markets and online calibration
This paper introduces a local volatility model for the valuation of options on commodity futures by using European vanilla option prices.
Estimating the tail shape parameter from option prices
In this paper, the author proposes a method to estimate the tail shape parameter of the risk-neutral density.
Local-stochastic volatility: models and non-models
Lorenzo Bergomi exposes a condition important to the use of LSV models in trading
Pricing and hedging options with rollover parameters
This paper consists of a “horse race” study comparing (i) a number of option pricing models, and (ii) roll-over estimation procedures.
Valuation of options on discretely sampled variance: a general analytic approximation
In this paper the authors provide a comprehensive treatment of the discretization effect under general stochastic volatility dynamics.
Updating the option implied probability of default methodology
This paper updates the option implied probability of default (iPoD) approach recently suggested in the literature.
Isolating a risk premium on the volatility of volatility
Lorenzo Ravagli shows how to exploit a risk premium embedded in the vol of vol in out-of-the-money options
On the application of spectral filters in a Fourier option pricing technique
When dealing with nonsmooth functions – such as a combination of a nonsmooth density and a payoff – spectral filters can be applied to deal efficiently with the so-called Gibbs phenomenon. The simplicity and effectiveness of classical filtering…