Learning Curve

Pricing credit default swaps means, above all, trying to attribute a value to the various components of the underlying asset. In this case, the asset is the credit risk of a certain reference entity, or to be more precise, the reference entity's risk of triggering a credit event.

The View From Fifty Thousand Feet

One of the difficulties in managing equity and foreign exchange barrier option books is handling potentially unstable gamma positions when the spot is near the barrier and/or the option near expiry. The figures below illustrate such an example using a down-and-out put. The option matures in one month, is struck at-the-money, and has a barrier at 80% of the strike. The top figure plots the option price versus spot and the large curvature near the barrier indicates a large gamma. This is clearly seen in the lower figure, which illustrates the corresponding gamma. The gamma profile near the barrier is quite unstable and the delta hedge will be inefficient and often costly. This is one of the main barrier risks. One technique to manage such risks is to use exponential soft barriers.

Introduction

Pricing a basket of stocks from one country proceeds essentially along the lines of pricing a basket of groceries.

A financial basket contains a fixed portfolio of financial objects, such as bonds, and shares.

Few people in the financial world would claim to be able to predict the markets.

In a global economy it is essential that each country establish a transparent and efficient regulatory system for financial products.

The usual forward contract specifies the exact maturity date for the delivery of a predetermined amount of the underlying asset.

The requirement to assess hedge effectiveness in the Financial Accounting Standards Board's new statement on derivatives accounting, Statement 133, Accounting for Derivative Instruments and Hedging Activities, is critical for qualifying for special hedge accounting.

The introduction of the new 6% notional coupon for T-bond and T-note futures, beginning with the March 2000 contracts, brought to the forefront an important concept that had long been disregarded: valuing the embedded quality option.

Hedging volatility skew in equity derivative markets is non-trivial in that the delta calculation is subject to assumptions made on volatility surface dynamics.