Learning Curve
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The volatility swap can be viewed as a logical next step in the application of derivatives to portfolio management.
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There is no particular value at which a foreign exchange rate is stable.
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The discussion in part one of this Learning Curve (DW, 2/2) has shown that it is possible to obtain a significant terminal de-correlation amongst rates even in the presence of perfect instantaneous correlation.
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In a previous learning curve (DW, 1/5), we introduced a notion of convexity cost in the option adjusted valuation.
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The consistent pricing of derivative products involving the joint realizations of a collection of forward rates requires the specification of the covariance matrix between the various underlying rates.
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As its name suggests, risk-adjusted return on capital analysis (RAROC) is a method for factoring risk into the computation and evaluation of financial returns.
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A vast amount of effort is spent upon producing complex market models.
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In their second article, Johan Beumée and Paul Wilmott look at how to construct a pricing model for warrants.
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