Review of Derivatives Research

This paper exploits individual trading records from a large brokerage service to investigate the trading patterns of retail investors who take short positions in stocks using contracts for differences (CFDs). Their risk tolerance, as reported in MiFID II questionnaires, and their leverage usage indicate greater risk-seeking behavior. Short positions, compared to long positions, constitute larger …

Abstract This paper develops an integrated optimisation model for pricing and hedging oil derivatives in incomplete markets where available market quotes and the trader’s views, inventory and risk aversion may affect the pricing. The model is well suited for practical applications such as the design of optimal cross-hedging strategies and the market-maker problem of pricing derivatives while mana…

Abstract This article provides exact valuation formulae for barrier options with a stochastic, outside and window barrier, in a model allowing for stochastic interest rate and jumps in the underlying asset. The case of a best-of option with the same barrier and model specifications is also covered. Formulae in the classical, more restrictive Black–Scholes environment are derived too. These analyt…

Geometric Asian options are a type of option where the payoff depends on the geometric mean of the underlying asset over a certain period of time. This paper is concerned with the pricing of such options for the class of Volterra-Heston models, covering the rough Heston model. We are able to derive semi-closed formulas for the prices of geometric Asian options with fixed and floating strikes for …

Abstract Loan screening and monitoring are critical to loan performance, but incentives are diminished for securitized loans. Risk retention is intended to harmonize the interests of originators and investors; however, it is unclear to what extent investors anticipate and respond to originators’ screening and monitoring incentives, particularly with respect to different types of risk retention. T…

It is already well documented that model risk is an important issue regarding the pricing of exotics (see Schoutens et al., in A perfect calibration! Now what?, Wilmott Magazine, March 2004: pp 66–78, 2004). Arguments have been made to put this into the perspective of bid-ask pricing using the theory of conic finance and pricing to acceptability (Cherny and Madan Review of Financial Studies, 22: …

Credit risk modeling is about modeling losses. These losses are typically coming unexpectedly and triggered by shocks. So any process modeling the stochastic nature of losses should reasonable include jumps. In this paper we review a few jump driven models for the valuation of Credit Default Swaps (CDSs) and show how under these dynamic models also pricing of (exotic) derivatives on single name C…