Articles
Amaranthus Extermino
On September 19, 2006 the hedge fund Amaranth Advisors of Greenwich, Connecticut announced that it had lost $6 billion, about two thirds of the $9.25 billion fund in less than two weeks, largely because it […]
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Articles
Order Statistics for Value at Risk Estimation and Option Pricing
We apply order statistics to the setting of VaR estimation. Here techniques like historical and Monte Carlo simulation rely on using the k-th heaviest loss to estimate the quantile of the profit and loss distribution […]
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Building Your Wings on the Way Down
Ray Bradbury famously defined “living at risk” as jumping off a cliff and building your wings on the way down. Too many financial risk managers who came late to the field think of risk as […]
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Internal LGD Estimation in Practice
Driven by a competitive market and motivated by the new Basel Capital Accord (Basel II), banks have put a lot of effort into development and improvement of their methods to assess the creditworthiness of their […]
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Scenarios IV: Planning for Disasters and then Dealing with them
As I write this it is the fourth anniversary of September 11, 2001. Aside from the anniversary specials airing today, there is little in the news these days about Osama Bin Laden. The news today […]
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A Conditional Valuation Approach for Path-Dependent Instruments
In an effort to improve credit risk management, financial institutions have developed various measures to manage their exposure to counterparty risk. One important measure of counterparty risk is potential future exposure (PFE), which is a […]
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Finformatics: How to Measure Really Small Things
Traders in financial assets implicitly compare the trading price to the stream of dividends the assets stand to generate. Clearly, a key determinant of value—usually the key determinant— will be the long-term drift or rate […]
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A VaR-based Model for the Yield Curve
An intuitive model for the yield curve, based on the notion of value-at-risk, is presented. It leads to interest rates that hedge against potential losses incurred from holding an underlying risky security until maturity. This […]
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Pricing Rainbow Options
A previous paper (West 2005) tackled the issue of calculating accurate uni-, bi- and trivariate normal probabilities. This has important applications in the pricing of multiasset options, e.g. rainbow options. In this paper, we derive […]
Articles
Valuation of American Call Options
The purpose of this paper is to provide an analytical solution for American call options assuming proportional dividends. Proportional dividends are more realistic for long-term options than absolute dividends and the formula does not have […]