Derivatives and Hedging: Topic 815

Pricing and Hedging Volatility Derivatives∗

This paper studies the pricing and hedging of variance swaps and other volatility derivatives, including volatility swaps and variance options, in the Heston stochastic volatility model. Pricing and hedging results are derived using partial differential equation techniques. We formulate an optimization problem to determine the number of options required to best hedge a variance swap. We propose...

Valuation and Hedging of Credit Derivatives

Wind Derivatives: Hedging Wind Risk Msc Thesis Applied Mathematics " Wind Derivatives: Hedging Wind Risk "

Preface Over the last 11 months, I have done research in the field of wind derivatives for my MSc thesis. I performed this research in close cooperation with Mercurious, and my professor Kees Oosterlee. In October 2012 the MSc thesis project was born at CWI in Amsterdam. That day I met with Kees Oosterlee and Jerry de Leeuw (managing director of Mercurious). Mercurious had spotted the opportuni...

Risk-neutral hedging of interest rate derivatives

In this paper we review the hedging of interest rate derivatives priced under a risk-neutral measure, and we compute self-financing hedging strategies for various derivatives using the Clark-Ocone formula.

Dynamic Hedging of Portfolio Credit Derivatives

We compare the performance of various hedging strategies for index collateralized debt obligation (CDO) tranches across a variety of models and hedging methods during the recent credit crisis. Our empirical analysis shows evidence for market incompleteness: a large proportion of risk in the CDO tranches appears to be unhedgeable. We also show that, unlike what is commonly assumed, dynamic model...