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Journal articles on the topic 'Derivative Valuation'

Author: Grafiati

Published: 4 June 2021

Last updated: 3 February 2022

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1

Ahmed, Anwer S., Emre Kilic, and Gerald J. Lobo. "Does Recognition versus Disclosure Matter? Evidence from Value-Relevance of Banks' Recognized and Disclosed Derivative Financial Instruments." Accounting Review 81, no. 3 (May 1, 2006): 567–88. http://dx.doi.org/10.2308/accr.2006.81.3.567.

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We provide evidence on how investor valuation of derivative financial instruments differs depending upon whether the fair value of these instruments is recognized or disclosed. Expanded disclosures and accounting practices prior to SFAS No. 133 and mandatory recognition of derivative fair values after SFAS No. 133 provide a natural setting for comparing the valuation implications of recognized and disclosed derivative fair value information. This unique setting mitigates many of the research design problems with recognition versus disclosure studies. Using a sample of banks that simultaneously hold recognized and disclosed derivatives prior to SFAS No. 133, we find that the valuation coefficients on recognized derivatives are significant, whereas the valuation coefficients on disclosed derivatives are not significant. Further, using a sample of banks that have only disclosed derivatives prior to SFAS No. 133, which are recognized after SFAS No.133, we find that while the valuation coefficients on disclosed derivatives are not significant, the valuation coefficients on recognized derivatives are significant. These results are consistent with the view that recognition and disclosure are not substitutes. Our findings suggest that SFAS No. 133 has increased the transparency of derivative financial instruments.

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2

NAUTA, BERT-JAN. "LIQUIDITY RISK, INSTEAD OF FUNDING COSTS, LEADS TO A VALUATION ADJUSTMENT FOR DERIVATIVES AND OTHER ASSETS." International Journal of Theoretical and Applied Finance 18, no. 02 (March 2015): 1550014. http://dx.doi.org/10.1142/s0219024915500144.

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Traditionally derivatives have been valued in isolation. The balance sheet of which a derivative position is part, was not included in the valuation. Recently however, aspects of the valuation have been revised to incorporate certain elements of the balance sheet. Examples are the debt valuation adjustment which incorporates default risk of the bank holding the derivative, and the funding valuation adjustment that some authors have proposed to include the cost of funding into the valuation. This paper investigates the valuation of derivatives as part of a balance sheet. In particular, the paper considers funding costs, default risk and liquidity risk. A valuation framework is developed under the elastic funding assumption. This assumption states that funding costs reflect the quality of the assets, and any change in asset composition is immediately reflected in the funding costs. The result is that funding costs should not affect the value of derivatives. Furthermore, a new model for pricing liquidity risk is described. The paper highlights that the liquidity spread, used for discounting cashflows of illiquid assets, should be expressed in terms of the liquidation value (LV) of the asset, and the probability that the institution holding the asset needs to liquidate its assets.

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3

Han, Meng, Yeqi He, and Hu Zhang. "A note on discounting and funding value adjustments for derivatives." Journal of Financial Engineering 01, no. 01 (March 2014): 1450008. http://dx.doi.org/10.1142/s2345768614500081.

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In this paper, valuation of a derivative partially collateralized in a specific foreign currency defined in its credit support annex traded between default-free counterparties is studied. Two pricing approaches — by hedging and by expectation — are presented to obtain similar valuation formulae which are equivalent under certain conditions. Our findings show that the current marking-to-market value of such a derivative consists of three components: the price of the perfectly collateralized derivative (a.k.a. the price by collateral rate discounting), the value adjustment due to different funding spreads between the payoff currency and the collateral currency, and the value adjustment due to funding requirements of the uncollateralized exposure. These results generalize previous works on discounting for fully collateralized derivatives and on funding value adjustments for partially collateralized or uncollateralized derivatives.

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4

Bakshi, Gurdip, and Dilip Madan. "Spanning and derivative-security valuation." Journal of Financial Economics 55, no. 2 (February 2000): 205–38. http://dx.doi.org/10.1016/s0304-405x(99)00050-1.

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5

SCHERER, MATTHIAS, and THORSTEN SCHULZ. "EXTREMAL DEPENDENCE FOR BILATERAL CREDIT VALUATION ADJUSTMENTS." International Journal of Theoretical and Applied Finance 19, no. 07 (November 2016): 1650042. http://dx.doi.org/10.1142/s0219024916500424.

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Recognizing counterparty default risk as integral part of the valuation process of financial derivatives has changed the classical view on option pricing. Calculating the bilateral credit valuation adjustment (BCVA) including wrong way risk (WWR) requires a sound model for the dependence structure between three quantities: the default times of the two contractual parties and the derivative/portfolio value at the first of the two default times. There exist various proposals, but no market consensus, on how this dependence structure should be modeled. Moreover, available mathematical tools depend strongly on the marginal models for the default times and the model for the underlying of the derivative. In practice, independence between all (or some) quantities is still a popular (over-)simplification, which completely misses the root of WWR. In any case, specifying the dependence structure imposes one to model risk and even within some parametric model one typically obtains a considerable interval of BCVA values when the parameters are taken to the extremes. In this work, we present a model-free approach to identify the dependence structure that implies the extremes of BCVA. This is achieved by solving a mass-transportation problem using tools from optimization.

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6

Lindo, Duncan. "Why derivatives need models: the political economy of derivative valuation models." Cambridge Journal of Economics 42, no. 4 (November 1, 2017): 987–1008. http://dx.doi.org/10.1093/cje/bex055.

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7

Bellalah, Mondher, and Marc Lavielle. "A Decomposition of Empirical Distributions with Applications to the Valuation of Derivative Assets." Multinational Finance Journal 6, no. 2 (June 1, 2002): 99–130. http://dx.doi.org/10.17578/6-2-2.

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8

BACK, JANIS, and MARCEL PROKOPCZUK. "COMMODITY PRICE DYNAMICS AND DERIVATIVE VALUATION: A REVIEW." International Journal of Theoretical and Applied Finance 16, no. 06 (September 2013): 1350032. http://dx.doi.org/10.1142/s0219024913500325.

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This paper reviews extant research on commodity price dynamics and commodity derivative pricing models. In the first half, we provide an overview of key characteristics of commodity price behavior that have been explored and documented in the theoretical and empirical literature. In the second half, we review existing derivative pricing models and discuss how the peculiarities of commodity markets have been integrated in these models. We conclude the paper with a brief outlook on various important research questions that need to be addressed in the future.

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9

WU, LIXIN. "CVA AND FVA TO DERIVATIVES TRADES COLLATERALIZED BY CASH." International Journal of Theoretical and Applied Finance 18, no. 05 (July 28, 2015): 1550035. http://dx.doi.org/10.1142/s0219024915500351.

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In this paper, we consider replication pricing of derivatives that are partially collateralized by cash. We let issuer replicate the derivatives payout using shares and cash, and let buyer replicate the loss given the counterparty default using credit default swaps. The costs of funding for replication and collateral posting are taken into account in the pricing process. A partial differential equation (PDE) for the derivatives price is established, and its solution is provided in a Feynman–Kac formula, which decomposes the derivatives value into the risk-free value of the derivative plus credit valuation adjustment (CVA) and funding valuation adjustment (FVA). For most derivatives, we show that CVAs can be evaluated analytically or semi-analytically, while FVAs as well as the derivatives values can be solved recursively through numerical procedures due to their interdependence. In numerical demonstrations, continuous and discrete margin revisions are considered, respectively, for an equity call option and a vanilla interest-rate swap.

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10

WU, LIXIN, and DAWEI ZHANG. "xVA: DEFINITION, EVALUATION AND RISK MANAGEMENT." International Journal of Theoretical and Applied Finance 23, no. 01 (February 2020): 2050006. http://dx.doi.org/10.1142/s0219024920500065.

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xVA is a collection of valuation adjustments made to the classical risk-neutral valuation of a derivative or derivatives portfolio for pricing or for accounting purposes, and it has been a matter of debate and controversy. This paper is intended to clarify the notion of xVA as well as the usage of the xVA items in pricing, accounting or risk management. Based on bilateral replication pricing using shares and credit default swaps, we attribute the P&L of a derivatives trade into the compensation for counterparty default risks and the costs of funding. The expected present values of the compensation and the funding costs under the risk-neutral measure are defined to be the bilateral CVA and FVA, respectively. The latter further breaks down into FCA, MVA, ColVA and KVA. We show that the market funding liquidity risk, but not any idiosyncratic funding risks, can be bilaterally priced into a derivative trade, without causing price asymmetry between the counterparties. We call for the adoption of VaR or CVaR methodologies for managing funding risks. The pricing of xVA of an interest-rate swap is presented.

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11

Choi, Jongmoo Jay, Connie X. Mao, and Arun D. Upadhyay. "Earnings Management and Derivative Hedging with Fair Valuation: Evidence from the Effects of FAS 133." Accounting Review 90, no. 4 (October 1, 2014): 1437–67. http://dx.doi.org/10.2308/accr-50972.

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ABSTRACT Barton (2001) and Pincus and Rajgopal (2002) show that earnings management through discretionary accruals and derivative hedging are partial substitutes in smoothing earnings before 1999. In this study, we investigate whether Financial Accounting Standard (FAS) 133 regarding hedge accounting in 2000 has influenced the relative merit of the two earnings-smoothing methods. Based on a sample of S&P 500 nonfinancial firms during 1996–2006, we find that the substitution relation between derivative hedging and discretionary accrual is significantly attenuated after FAS 133 implementation. We also document a significant increase in earnings volatility associated with derivative hedging post-FAS 133. These results are robust to the use of various model and method specifications, as well as controlling for contemporaneous macroeconomic and regulatory shocks. Overall, our results suggest that a material change in an accounting rule regarding derivatives can influence the level and volatility of reported earnings, as well as the method of income smoothing. JEL Classifications: G32; M41; M48

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12

Jaimungal, Sebastian, and Vladimir Surkov. "Lévy-Based Cross-Commodity Models and Derivative Valuation." SIAM Journal on Financial Mathematics 2, no. 1 (January 2011): 464–87. http://dx.doi.org/10.1137/100791609.

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13

STUTZER, MICHAEL. "A Simple Nonparametric Approach to Derivative Security Valuation." Journal of Finance 51, no. 5 (December 1996): 1633–52. http://dx.doi.org/10.1111/j.1540-6261.1996.tb05220.x.

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14

Huang, Jr-Wei, Sharon S. Yang, and Chuang-Chang Chang. "Modeling temperature behaviors: Application to weather derivative valuation." Journal of Futures Markets 38, no. 9 (May 2, 2018): 1152–75. http://dx.doi.org/10.1002/fut.21923.

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15

Jiang, Yanan, and Michael D. Marcozzi. "Asset liquidity and the valuation of derivative securities." Journal of Computational and Applied Mathematics 236, no. 17 (November 2012): 4525–36. http://dx.doi.org/10.1016/j.cam.2012.05.005.

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16

Lee, Su Jeong, Young Jun Kim, Eugenia Y. Lee, and Ga-young Choi. "Market Reactions to Announcements of Valuation Losses on Conversion Rights Embedded in Convertible Instruments." Journal of Derivatives and Quantitative Studies 28, no. 1 (February 29, 2020): 35–61. http://dx.doi.org/10.37270/jdqs.28.1.2.

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Convertible instruments are financial instruments embedded with conversion rights such as convertible bonds or convertible preferred stocks. Under the Korean International Financial Reporting Standards (K-IFRS), the embedded conversion rights with certain conditions (i.e., a refixing clause) are recognized as derivative liabilities and are recognized at fair value in issuer’s financial statements. Since the value of convertible rights varies with the underlying stock value, an increase in the issuers’ stock price causes the issuers of convertible instruments to announce large derivative valuation losses. Using disclosures under the title of ‘Loss from Derivatives Trading’ from the KOREA EXCHANGE (KRX) during January 2016 through December 2019, this study examines market reactions to the disclosure of valuation losses on conversion rights embedded in convertible instruments. We find the following results. First, abnormal stock returns on the loss announcement date are significantly negative. Second, abnormal trading volumes peak on the loss announcement date. Third, abnormal stock returns persist in the long-term. Collectively, our findings suggest that investors perceive the loss disclosures as negative news, but fail to impound the information into issuer’s stock prices effectively. This study emphasizes the importance of education on convertible instruments and improvement in the disclosure requirements on valuation losses of conversion rights embedded in convertible instruments by providing evidence that investors face difficulty in understanding the related disclosures.

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17

Chen, Ren-Raw, Jeffrey Huang, William Huang, and Robert Yu. "An Artificial Intelligence Approach to the Valuation of American-Style Derivatives: A Use of Particle Swarm Optimization." Journal of Risk and Financial Management 14, no. 2 (February 2, 2021): 57. http://dx.doi.org/10.3390/jrfm14020057.

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In this paper, we evaluate American-style, path-dependent derivatives with an artificial intelligence technique. Specifically, we use swarm intelligence to find the optimal exercise boundary for an American-style derivative. Swarm intelligence is particularly efficient (regarding computation and accuracy) in solving high-dimensional optimization problems and hence, is perfectly suitable for valuing complex American-style derivatives (e.g., multiple-asset, path-dependent) which require a high-dimensional optimal exercise boundary.

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18

Lindgren, Jussi. "Efficient Markets and Contingent Claims Valuation: An Information Theoretic Approach." Entropy 22, no. 11 (November 12, 2020): 1283. http://dx.doi.org/10.3390/e22111283.

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This research article shows how the pricing of derivative securities can be seen from the context of stochastic optimal control theory and information theory. The financial market is seen as an information processing system, which optimizes an information functional. An optimization problem is constructed, for which the linearized Hamilton–Jacobi–Bellman equation is the Black–Scholes pricing equation for financial derivatives. The model suggests that one can define a reasonable Hamiltonian for the financial market, which results in an optimal transport equation for the market drift. It is shown that in such a framework, which supports Black–Scholes pricing, the market drift obeys a backwards Burgers equation and that the market reaches a thermodynamical equilibrium, which minimizes the free energy and maximizes entropy.

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19

Frimpong, Samuel, and Jerry M. Whiting. "Derivative mine valuation: strategic investment decisions in competitive markets." Resources Policy 23, no. 4 (December 1997): 163–71. http://dx.doi.org/10.1016/s0301-4207(97)00029-9.

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20

Laurent, Jean-Paul, Philippe Amzelek, and Joe Bonnaud. "An overview of the valuation of collateralized derivative contracts." Review of Derivatives Research 17, no. 3 (August 28, 2014): 261–86. http://dx.doi.org/10.1007/s11147-014-9098-8.

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21

Mi, Yanhui. "Asset pricing under general collateralization." International Journal of Financial Engineering 04, no. 02n03 (June 2017): 1750019. http://dx.doi.org/10.1142/s2424786317500190.

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We consider the valuation of collateralized derivative contracts such as bond option or Caplet contracts. We allow for posting different collaterals such as securities or cash for the derivatives and its hedges. The pricing is based on modeling the joint evolution of collateral rate and the spread between collaterals. The Hull–White models are applied to collateral rate and spread to generate the closed pricing formula for zero coupon bond option. We also derive the pricing formula for Caplet under the Libor Market model and SABR model framework.

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22

Seitshiro, Modisane Bennett, and Hopolang Phillip Mashele. "Valuation of initial margin using bootstrap method." Journal of Risk Finance 21, no. 5 (June 15, 2020): 543–57. http://dx.doi.org/10.1108/jrf-10-2019-0203.

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Purpose The purpose of this paper is to propose the parametric bootstrap method for valuation of over-the-counter derivative (OTCD) initial margin (IM) in the financial market with low outstanding notional amounts. That is, an aggregate outstanding gross notional amount of OTC derivative instruments not exceeding R20bn. Design/methodology/approach The OTCD market is assumed to have a Gaussian probability distribution with the mean and standard deviation parameters. The bootstrap value at risk model is applied as a risk measure that generates bootstrap initial margins (BIM). Findings The proposed parametric bootstrap method is in favour of the BIM amounts for the simulated and real data sets. These BIM amounts are reasonably exceeding the IM amounts whenever the significance level increases. Research limitations/implications This paper only assumed that the OTCD returns only come from a normal probability distribution. Practical implications The OTCD IM requirement in respect to transactions done by counterparties may affect the entire financial market participants under uncleared OTCD, while reducing systemic risk. Thus, reducing spillover effects by ensuring that collateral (IM) is available to offset losses caused by the default of a OTCDs counterparty. Originality/value This paper contributes to the literature by presenting a valuation of IM for the financial market with low outstanding notional amounts by using the parametric bootstrap method.

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23

Vieira Neto, Cícero Augusto, and Pedro L. Valls Pereira. "Modelando a Estrutura a Termo da Taxa de Juros: Dinâmica e Avaliação de Contratos Derivativos." Brazilian Review of Finance 3, no. 1 (January 1, 2005): 19. http://dx.doi.org/10.12660/rbfin.v3n1.2005.1144.

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This article deals with a model for the term structure of interest rates and the valuation of derivative contracts directly dependent on it. The work is of a theoretical nature and deals, exclusively, with continuous time models, making ample use of stochastic calculus results and presents original contributions that we consider relevant to the development of the fixed income market modeling. We develop a new multifactorial model of the term structure of interest rates. The model is based on the decomposition of the yield curve into the factors level, slope, curvature, and the treatment of their collective dynamics. We show that this model may be applied to serve various objectives: analysis of bond price dynamics, valuation of derivative contracts and also market risk management and formulation of operational strategies which is presented in another article.

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24

Novak, Oksana, Tetiana Osadcha, and Oleksandr Petruk. "CONCEPT AND CLASSIFICATION OF DERIVATIVE FINANCIAL INSTRUMENTS AS A METHODOLOGICAL PRECISION ON THEIR REGULATION IN THE FINANCIAL SERVICES MARKET." Baltic Journal of Economic Studies 5, no. 3 (August 1, 2019): 135. http://dx.doi.org/10.30525/2256-0742/2019-5-3-135-144.

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The urgency of the research topic is caused by the rapid growth of capital markets and the emergence of all new financial instruments, the complexity of their structure and the transition beyond the regulatory influence of supervisory authorities. Discussion issues on the identification of derivatives, as well as their certain types, create significant problems with their valuation, the correctness of accounting, and the application of regulatory measures. Inconsistency in the interpretation of derivative financial instruments nature and their certain types is also present in domestic legal acts. Therefore, until the elimination of these shortcomings, derivative financial instruments create additional risks for their owners – financial institutions, as well as for creditors and depositors. The purpose of the research, conducted in the article, lies in the clarification of derivatives nature and developing an appropriate classification of their types in order to its further use with a view of regulation. The methodological basis of the research. The methodological basis of the study is a dialectical approach to the understanding of the essence of derivative financial instruments; general scientific methods of knowledge of phenomena and processes (monographic, abstract-logical, synthesis, comparison, generalization), analysis of legal acts in the part of treatment of derivatives, derivative financial instruments and derivative securities, methods of grouping systematization and generalization in developing the classification of derivative financial instruments. Scientific results. It has been established that in order to maintain the stability of financial markets and their participants, the transformation of regulatory measures should be a permanent development and modification of the financial instruments that are being rotated. Various approaches to the interpretation of derivative financial instruments essence in normative legal acts and scientific literature have been analysed in order to improve the regulation of their issuance and circulation. This made it possible to streamline the conceptual apparatus and to group certain types of derivatives according to certain classification grounds. The basis for classification is the concept of “derivative financial instruments” as the broadest, which includes derivative securities and term contracts (derivatives). The concept of derivatives and derivative securities are delimited based on the study of terminology. It was established that derivatives are standard documents that certify the right and/or obligation to purchase or sell future securities, tangible or intangible assets, as well as funds or make payments on terms and conditions specified by them. However, in some cases, derivatives may acquire features of derivative securities, in particular, when issued through emission and freely traded in markets and bring income (losses) to their owner as a result of changes in their market value. The practical significance. The practical value of the research is the possibility of using the developed classification for the needs of emission regulation and the circulation of derivative financial instruments.

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25

Chu, Hsiang Hui, and Yi Fang Chung. "Analysis of the Contagion Effect to the Credit Derivative Valuation." Asian Economic and Financial Review 6, no. 10 (2016): 571–82. http://dx.doi.org/10.18488/journal.aefr/2016.6.10/102.10.571.582.

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26

Hinz, Juri. "Weather Derivative Valuation: The Meteorological, Statistical, Financial and Mathematical Foundations." Journal of the American Statistical Association 102, no. 477 (March 2007): 380. http://dx.doi.org/10.1198/jasa.2007.s164.

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27

Sapariuc, I., M. D. Marcozzi, and J. E. Flaherty. "A numerical analysis of variational valuation techniques for derivative securities." Applied Mathematics and Computation 159, no. 1 (November 2004): 171–98. http://dx.doi.org/10.1016/j.amc.2003.10.041.

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28

Yam, Phillip S. C., and Hailiang Yang. "On Valuation of Derivative Securities: A Lie Group Analytical Approach." Applications of Mathematics 51, no. 1 (February 2006): 49–61. http://dx.doi.org/10.1007/s10492-006-0004-z.

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29

Vlachý, Jan. "Designing and Applying a Nonparametric Option Valuation Model." Financial Assets and Investing 7, no. 1 (March 31, 2016): 50–61. http://dx.doi.org/10.5817/fai2016-1-3.

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This paper derives, tests and discusses a comprehensive and easy to use nonparametric option-valuation model, using a representative set of historical data on underlying asset returns jointly with an assumption of minimalistic implied information on current market trend and volatility expectations. Its testing on empirical data from Warsaw Stock Exchange trading for two distinct periods of 2014 suggests that such distribution-free models are capable of delivering useful market insights as well as applicability features, in particular wherever derivative markets are relatively new, incomplete, illiquid, or with regard to the valuation of real options.

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30

ALBANESE, CLAUDIO, DAMIANO BRIGO, and FRANK OERTEL. "RESTRUCTURING COUNTERPARTY CREDIT RISK." International Journal of Theoretical and Applied Finance 16, no. 02 (March 2013): 1350010. http://dx.doi.org/10.1142/s0219024913500106.

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We introduce an innovative theoretical framework for the valuation and replication of derivative transactions between defaultable entities based on the principle of arbitrage freedom. Our framework extends the traditional formulations based on credit and debit valuation adjustments (CVA and DVA). Depending on how the default contingency is accounted for, we list a total of ten different structuring styles. These include bi-partite structures between a bank and a counterparty, tri-partite structures with one margin lender in addition, quadri-partite structures with two margin lenders and, most importantly, configurations where all derivative transactions are cleared through a central counterparty clearing house (CCP). We compare the various structuring styles under a number of criteria including consistency from an accounting standpoint, counterparty risk hedgeability, numerical complexity, transaction portability upon default, induced behavior and macro-economic impact of the implied wealth allocation.

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31

Vahdatmanesh, Mohammad, and Afshin Firouzi. "Price risk management in BOT railroad construction projects using financial derivatives." Journal of Financial Management of Property and Construction 23, no. 3 (November 5, 2018): 349–62. http://dx.doi.org/10.1108/jfmpc-04-2018-0021.

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Purpose Railroad transit infrastructures are amongst major capital-intensive projects worldwide, which impose significant risks to the contractors of build-operate-transfer projects because of the fluctuations in steel price fluctuation. The purpose of this paper is to introduce a methodology for hedging steel price risk using financial derivatives. Design/methodology/approach Cox–Ross valuation lattice has been used as an option valuation model for determining option’s price for the construction companies involved in fixed-price railroad projects. A sensitivity analysis has been conducted using the financial option Greeks to evaluate the impacts of option’s pricing factors in the total price of option. Findings The result of valuation shows that European options cost to safeguard against the effects of price risk is only a fraction in contrast to the total cost of steel procurement for a typical railroad construction company. This confirms that using this kind of financial derivative is a beneficial yet effective approach for hedging steel price risk for railroad construction companies. Practical implications The applicability of the financial derivatives, both exchange-traded and over-the-counter instruments, is evident in broad financial industry. This paper shows how European options can be readily used for risk management of a typical railroad project, and explains the methodology in a step-by-step procedure. Originality/value Although the financial engineering literature is rife of theory and application of derivatives in various contexts, to the best knowledge of authors there is only few papers on the application of these well-developed financial instruments for risk management in construction industry. This study intends to illustrate how financial derivatives can add value to risky construction projects and shed new light in this important application area.

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32

RUTKOWSKI, MAREK, and NANNAN YU. "AN EXTENSION OF THE BRODY–HUGHSTON–MACRINA APPROACH TO MODELING OF DEFAULTABLE BONDS." International Journal of Theoretical and Applied Finance 10, no. 03 (May 2007): 557–89. http://dx.doi.org/10.1142/s0219024907004263.

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The innovative information-based framework for credit risk modeling, proposed recently by Brody, Hughston, and Macrina, is extended to a more general and practically important setup of random interest rates. We first introduce the market model, and we derive an explicit expression for defaultable bond price. Next, the dynamics of the information process and dynamics of defaultable bond are found for both deterministic and random interest rates. Finally, the valuation and hedging of derivative securities are briefly examined. In particular, the valuation formula for a European option on a defaultable bond is established.

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33

Jang, Bong-Gyu, Sang-Gyu Lim, and Ho-Seok Lee. "Stochastic Behavior of Commodity Prices: The Valuation of Derivative-Linked Securities." Journal of Derivatives and Quantitative Studies 17, no. 1 (February 28, 2009): 51–75. http://dx.doi.org/10.1108/jdqs-01-2009-b0003.

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We investigated term structure models for commodity prices to value derivative-linked securities (DLS) traded in Korea. We especially highlighted geometric Brownian motion (GBM) model considering a convenience yield and Schwartz model reflecting mean-reverting property. One of key characteristics of the paper is that this paper provides theoretical models for multi underlying assets and the model combining GBM model and Schwartz model. Furthermore, it gives us an analysis for quanto adjustment which occurs in the valuation of DLS. In case of GBM model, quanto adjustment seems to be relatively simple by adjusting a constant ratio to risk-free interest rate. Unlike GBM model, we find out that, in case of Schwartz model, such adjustment can be achieved only when the stochastic process of foreign exchange rate is considered. After having valuation, both models show stable results for DLS prices using WTI index as an underlying asset. However, they results in outcomes, which are relatively not stable, on valuing DLS written on multi underlying assets including nickel.

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34

Ciurlia, Pierangelo, and Andrea Gheno. "Pricing and Applications of Digital Installment Options." Journal of Applied Mathematics 2012 (2012): 1–21. http://dx.doi.org/10.1155/2012/584705.

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For its theoretical interest and strong impact on financial markets, option valuation is considered one of the cornerstones of contemporary mathematical finance. This paper specifically studies the valuation of exotic options with digital payoff and flexible payment plan. By means of the Incomplete Fourier Transform, the pricing problem is solved in order to find integral representations of the upfront price for European call and put options. Several applications in the areas of corporate finance, insurance, and real options are discussed. Finally, a new type of digital derivative named supercash option is introduced and some payment schemes are also presented.

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35

Boyle, Phelim P. "Valuation of derivative securities involving several assets using discrete time methods." Insurance: Mathematics and Economics 9, no. 2-3 (September 1990): 131–39. http://dx.doi.org/10.1016/0167-6687(90)90025-9.

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36

FARKAS, WALTER, NILS REICH, and CHRISTOPH SCHWAB. "ANISOTROPIC STABLE LEVY COPULA PROCESSES — ANALYTICAL AND NUMERICAL ASPECTS." Mathematical Models and Methods in Applied Sciences 17, no. 09 (September 2007): 1405–43. http://dx.doi.org/10.1142/s0218202507002327.

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We consider the valuation of derivative contracts on baskets of risky assets whose prices are Lévy-like Feller processes of tempered stable type. The dependence among the marginals' jump structure is parametrized by a Lévy copula. For marginals of regular, exponential Lévy type in the sense of Ref. 7 we show that the infinitesimal generator [Formula: see text] of the resulting Lévy copula process is a pseudo-differential operator whose principal symbol is a distribution of anisotropic homogeneity. We analyze the jump measure of the corresponding Lévy copula processes. We prove that the domains of their infinitesimal generators [Formula: see text] are certain anisotropic Sobolev spaces. In these spaces and for a large class of Lévy copula processes, we prove a Gårding inequality for [Formula: see text]. We design a wavelet-based dimension-independent tensor product discretization for the efficient numerical solution of the parabolic Kolmogorov equation [Formula: see text] arising in valuation of derivative contracts under possibly stopped Lévy copula processes. In the wavelet basis, diagonal preconditioning yields a bounded condition number of the resulting matrices.

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37

Van Vuuren, Gary Wayne, and Ja'nel Esterhuysen. "A primer on counterparty valuation adjustments in South Africa." South African Journal of Economic and Management Sciences 17, no. 5 (November 28, 2014): 584–600. http://dx.doi.org/10.4102/sajems.v17i5.648.

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Counterparty valuation adjustment (CVA) risk accounts for losses due to the deterioration in credit quality of derivative counterparties with large credit spreads. Of the losses attributed to counterparty credit risk incurred during the financial crisis of 2008-9 were due to CVA risk; the remaining third were due to actual defaults. Regulatory authorities have acknowledged and included this risk in the new Basel III rules. The capital implications of CVA risk in the South African milieu are explored, as well as the sensitivity of CVA risk components to market variables. Proposed methodologies for calculating changes in CVA are found to be unstable and unreliable at high average spread levels.

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38

Kemp, M. H. D. "Risk Management in a Fair Valuation World." British Actuarial Journal 11, no. 4 (October 1, 2005): 595–712. http://dx.doi.org/10.1017/s1357321700003299.

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ABSTRACTThis paper considers the impact that the current trend towards fair valuation of assets and liabilities is likely to have on risk measurement and management practices within the financial services industry. The paper analyses the different sorts of risks faced by organisations such as asset managers, pension funds, banks and insurers, and seeks to identify how their approach to the measurement and management of these sorts of risks might change as fair valuation becomes more entrenched. It argues that what it describes as traditional ‘time series’ based risk measurement is likely to be progressively displaced over time by a greater emphasis on what the paper refers to as ‘derivative pricing’ (or ‘fair value’ or ‘market consistent’) based risk modelling. It comments on the trend towards liability driven investment. The paper focuses on ‘financial’ risks (market, credit, liquidity and, more generally, asset/liability risk) rather than ‘operational’ risks, whilst noting that the dividing line between the two can be open to interpretation. Insurance risk is seen as in some respects straddling both camps.

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Ramasamy, Ravindran, Mahalakshmi Suppiah, and Zulkifflee Mohamed. "Effectiveness of Tridiagonal Path Dependent Option Valuation in Weak Derivative Market Environment." Indian Journal of Finance 9, no. 9 (September 1, 2015): 7. http://dx.doi.org/10.17010//2015/v9i9/77192.

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Ramasamy, Ravindran, Mahalakshmi Suppiah, and Zulkifflee Mohamed. "Effectiveness of Tridiagonal Path Dependent Option Valuation in Weak Derivative Market Environment." Indian Journal of Finance 9, no. 9 (September 1, 2015): 7. http://dx.doi.org/10.17010/ijf/2015/v9i9/77192.

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41

Chataigner, Marc, and Stéphane Crépey. "Credit Valuation Adjustment Compression by Genetic Optimization." Risks 7, no. 4 (September 29, 2019): 100. http://dx.doi.org/10.3390/risks7040100.

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Since the 2008–2009 financial crisis, banks have introduced a family of X-valuation adjustments (XVAs) to quantify the cost of counterparty risk and of its capital and funding implications. XVAs represent a switch of paradigm in derivative management, from hedging to balance sheet optimization. They reflect market inefficiencies that should be compressed as much as possible. In this work, we present a genetic algorithm applied to the compression of credit valuation adjustment (CVA), the expected cost of client defaults to a bank. The design of the algorithm is fine-tuned to the hybrid structure, both discrete and continuous parameter, of the corresponding high-dimensional and nonconvex optimization problem. To make intensive trade incremental XVA computations practical in real-time as required for XVA compression purposes, we propose an approach that circumvents portfolio revaluation at the cost of disk memory, storing the portfolio exposure of the night so that the exposure of the portfolio augmented by a new deal can be obtained at the cost of computing the exposure of the new deal only. This is illustrated by a CVA compression case study on real swap portfolios.

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JACKSON, KEN, ALEX KREININ, and WANHE ZHANG. "FAST VALUATION OF FORWARD-STARTING BASKET DEFAULT SWAPS." International Journal of Theoretical and Applied Finance 13, no. 02 (March 2010): 195–209. http://dx.doi.org/10.1142/s0219024910005735.

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A basket default swap (BDS) is a credit derivative with contingent payments that are triggered by a combination of default events of the reference entities. A forward-starting basket default swap (FBDS) is a BDS starting at a specified future time. Existing analytic or semi-analytic methods for pricing FBDS are time consuming due to the large number of possible default combinations before the BDS starts. This paper develops a fast approximation method for FBDS based on the conditional independence framework. The method converts the pricing of a FBDS to an equivalent BDS pricing problem and combines Monte Carlo simulation with an analytic approach to achieve an effective method. This hybrid method is a novel technique which can be viewed either as a means to accelerate the convergence of Monte Carlo simulation or as a way to estimate parameters in an analytic method that are difficult to compute directly. Numerical results demonstrate the accuracy and efficiency of the proposed hybrid method.

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Brigo, Damiano, and Andrea Pallavicini. "Nonlinear consistent valuation of CCP cleared or CSA bilateral trades with initial margins under credit, funding and wrong-way risks." Journal of Financial Engineering 01, no. 01 (March 2014): 1450001. http://dx.doi.org/10.1142/s2345768614500019.

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The introduction of Central Clearing Counterparties (CCPs) in most derivative transactions will dramatically change the landscape of derivatives pricing, hedging and risk management, and, according to the TABB Group, will lead to an overall liquidity impact of about USD 2 trillions. In this paper, we develop for the first time a comprehensive approach for pricing under CCP clearing, including variation and initial margins, gap credit risk and collateralization, showing concrete examples for interest rate swaps. This framework stems from our 2011 framework on credit, collateral and funding costs in Pallavicini et al. (Pallavicini, A., D. Perini and D. Brigo, 2011, Funding Valuation Adjustment: FVA consistent with CVA, DVA, WWR, Collateral, Netting and Re-hypothecation, arxiv.org, ssrn.com). Mathematically, the inclusion of asymmetric borrowing and lending rates in the hedge of a claim, and a replacement closeout at default, lead to nonlinearities showing up in claim dependent pricing measures, aggregation dependent prices, nonlinear Partial Differential Equations (PDEs) and Backward Stochastic Differential Equations (BSDEs). This still holds in presence of CCPs and CSA. We introduce a modeling approach that allows us to enforce rigorous separation of the interconnected nonlinear risks into different valuation adjustments where the key pricing nonlinearities are confined to a funding costs component that is analyzed through numerical schemes for BSDEs. We present a numerical case study for Interest Rate Swaps that highlights the relative size of the different valuation adjustments and the quantitative role of initial and variation margins, of liquidity bases, of credit risk, of the margin period of risk and of wrong-way risk correlations.

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Ruan, Xinfeng, Wenli Zhu, Shuang Li, and Jiexiang Huang. "Option Pricing under Risk-Minimization Criterion in an Incomplete Market with the Finite Difference Method." Mathematical Problems in Engineering 2013 (2013): 1–9. http://dx.doi.org/10.1155/2013/165727.

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We study option pricing with risk-minimization criterion in an incomplete market where the dynamics of the risky underlying asset is governed by a jump diffusion equation with stochastic volatility. We obtain the Radon-Nikodym derivative for the minimal martingale measure and a partial integro-differential equation (PIDE) of European option. The finite difference method is employed to compute the European option valuation of PIDE.

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Tsanakas, Andreas, Mario V. Wüthrich, and Aleš Černý. "MARKET VALUE MARGIN VIA MEAN–VARIANCE HEDGING." ASTIN Bulletin 43, no. 3 (July 18, 2013): 301–22. http://dx.doi.org/10.1017/asb.2013.18.

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AbstractWe use mean–variance hedging in discrete time in order to value an insurance liability. The prediction of the insurance liability is decomposed into claims development results, that is, yearly deteriorations in its conditional expected values until the liability is finally settled. We assume the existence of a tradeable derivative with binary pay-off written on the claims development result and available in each development period. General valuation formulas are stated and, under additional assumptions, these valuation formulas simplify to resemble familiar regulatory cost-of-capital-based formulas. However, adoption of the mean–variance framework improves upon the regulatory approach by allowing for potential calibration to observed market prices, inclusion of other tradeable assets, and consistent extension to multiple periods. Furthermore, it is shown that the hedging strategy can also lead to increased capital efficiency.

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Hull, John, and Alan White. "One-Factor Interest-Rate Models and the Valuation of Interest-Rate Derivative Securities." Journal of Financial and Quantitative Analysis 28, no. 2 (June 1993): 235. http://dx.doi.org/10.2307/2331288.

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47

CUTHBERTSON, CHARLES, GRIGORIOS PAVLIOTIS, AVRAAM RAFAILIDIS, and PETTER WIBERG. "ASYMPTOTIC ANALYSIS FOR FOREIGN EXCHANGE DERIVATIVES WITH STOCHASTIC VOLATILITY." International Journal of Theoretical and Applied Finance 13, no. 07 (November 2010): 1131–47. http://dx.doi.org/10.1142/s0219024910006145.

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We consider models for the valuation of derivative securities that depend on foreign exchange rates. We derive partial differential equations for option prices in an arbitrage-free market with stochastic volatility. By use of standard techniques, and under the assumption of fast mean reversion for the volatility, these equations can be solved asymptotically. The analysis goes further to consider specific examples for a number of options, and to a considerable degree of complexity.

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Petruk, Oleksandr, and Oksana Novak. "State and Prospects of Using the Сryptocurrency Derivatives." Accounting and Finance, no. 3(89) (2020): 60–65. http://dx.doi.org/10.33146/2307-9878-2020-3(89)-60-65.

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The emergence and rapid development of the cryptocurrency market necessitated its organization and legal regulation. Today in Ukraine, businesses are allowed to record cryptocurrency as a financial asset (financial instrument / intangible asset), so cryptocurrency can be used by businesses and individuals as an investment. In developed countries, where the legal framework for the operation of cryptocurrencies has been created, new derivative financial instruments are emerging: Bitcoin futures and options on Bitcoin futures. The purpose of the article is to study the features of derivative financial instruments for cryptocurrencies and prospects for their use in Ukraine. The authors analyzed the peculiarities of the functioning of Bitcoin derivatives on Chicago Mercantile Exchange (CME). It has been established that both Bitcoin futures and options on Bitcoin futures are settlement contracts without the actual delivery of the underlying asset, and their value is formed depending on the spot prices for bitcoin. According to the results of the study, it can be argued that derivatives based on cryptocurrencies (bitcoin) are used mainly for speculative purposes, are highly volatile and high risk, require significant investment to participate in trading (compared to derivatives on traditional financial instruments) and do not involve any transactions with direct cryptocurrencies. Domestic legislation does not explicitly prohibit investments in cryptocurrencies and financial instruments derived from them, but does not determine the legal status of cryptocurrencies. National financial market regulators do not provide any guidance on valuation, accounting and cryptocurrency transactions to businesses, but only warn of the high risks of investing in cryptocurrencies.

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XU, GUANGLI, SHIYU SONG, and YONGJIN WANG. "THE VALUATION OF OPTIONS ON FOREIGN EXCHANGE RATE IN A TARGET ZONE." International Journal of Theoretical and Applied Finance 19, no. 03 (April 21, 2016): 1650020. http://dx.doi.org/10.1142/s0219024916500205.

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This paper derives a simple model to analyze foreign exchange rate behavior under a target zone regime. From the real market data of exchange rate of US Dollar (USD) to Hong Kong Dollar (HKD) (USD/HKD), somewhat surprisingly, we find that some of the observations fall outside the stated range. Consequently, a so-called skew CIR model for this exchange rate which has a probability of exceeding the stated boundary is developed. A spectral expansion approach is used to analyze the model. The valuation of the barrier and the one-touch options for the derivative written on the exchange rate is studied in the end.

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50

Muir, M. J., A. Chase, P. S. Coleman, P. Cooper, G. S. Finkelstein, P. Fulcher, C. Harvey, F. R. Pereira, A. Shamash, and T. J. D. Wilkins. "Credit Derivatives. Prepared by the Derivatives Working Party of the Faculty and Institute of Actuaries." British Actuarial Journal 13, no. 2 (July 1, 2007): 185–236. http://dx.doi.org/10.1017/s135732170000146x.

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ABSTRACTThis paper was written by the Derivatives Working Party, a permanent working party of the Life Research Committee of the Institute and Faculty of Actuaries. Our aim is to consider how life assurers may use, or may wish to use, derivatives, and if their use is unduly constrained, e.g. by regulation. This paper focuses on credit derivatives. We provide an overview of the credit derivatives market, and the strong growth in this market over recent years. We then focus on the two main traded credit derivative instruments — Credit Default Swaps (CDSs) and Collateralised Debt Obligations (CDOs). We explain how these instruments work and are priced, and clarify some of the more complex topics involved, such as the settlement of CDSs, basis risk and the relevance of implied correlation in pricing CDOs. We then consider how life insurers could make use of credit derivatives, for example to provide more efficient investment management in taking exposure to credit risk, or to hedge credit exposures, and consider the regulatory implications of so doing. Finally, in the Appendix, we discuss the credit spread puzzle, and the existence or otherwise of a liquidity premium in corporate bond spreads, with implications for the valuation of illiquid liabilities.

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