This paper provides a new approach for pricing and hedging popular highly pathdependent equity-linked contracts. We illustrate our technique with two examples: the locally-capped contracts (a popular design on the exchange-listed retail investment contracts on the American Stock Exchange) and the Cliquet option (extensively sold by insurance companies). Wilmott [17] describes these types of con...

We derive a formula for a Fourier transform of a counting process that describes the arrival of unpredictable events, and we show how this transform facilitates an analytical treatment of a range of valuation, hedging and risk management problems that arise in single name and portfolio credit risk. Example applications include reduced form pricing of credit sensitive securities referenced on si...

This paper studies correlations among independently administered hypothetical tests of a simple interactive type, and demonstrates that correlations arising in quantum information theoretic variants of these tests can exhibit a striking non-classical behavior. When viewed in a game-theoretic setting, these correlations are suggestive of a perfect form of hedging, where the risk of a loss in one...

Credit derivatives are subject to at least two sources of risk: the default time and the recovery payment. This paper examines the impact of modeling the recovery payment on hedging strategies in a reduced-form model as well as a Merton-type model. We show that quadratic hedging approaches do only depend on the expected recovery payment at default and not the whole shape of the recovery payment...

This paper investigates the impact of hedging activities on U.S. export pricing. A theoretical framework of export pricing model with a hedging component was derived to test the hypothesis via exchange rate pass-through. The hypothesis is that a firm with a high (low) hedging engagement would have a low (normal) degree of exchange rate pass-through, ceteris paribus. Two measurements of the hedg...

This article shows that the one-state-variable interest-rate models of.There are an enormous number of derivative securities being traded in financial markets. And just define those securities that we shall be pricing. Definition.We present a model for pricing and hedging derivative securities and option portfolios in an. In this equation, the pricing volatility is selected dynamically from.Bec...

The correction in value of an OTC derivative contract due to counterparty risk under funding constraints, is represented as the value of a dividend-paying option on the value of the contract clean of counterparty risk and excess funding costs. This representation allows one to analyze the structure of this correction, the so-called Credit Valuation Adjustment (CVA for short), in terms of replac...

Effective hedging strategies for variable annuities are crucial for insurance companies in preventing potentially large losses. We consider discrete hedging of options embedded in guarantees with ratchet features, under both equity (including jump) risk and interest rate risk. Since discrete hedging and the underlying model considered lead to an incomplete market, we compute hedging strategies ...

MARCH 1995 Hedging interest rate risk has become one of the most common and important types of a financial manager's risk management activities. A classic example is for a firm to hedge its cost of funds by using an interest rate cap to place an upper bound on its borrowing costs. The hedge typically consists of a sequence of individual call options on the interest rate, with option expiration ...

The purpose of this paper is to investigate the use of Principal Component Analysis in finding the efficient subset of underlying assets for hedging European basket options. This asset selection technique can be used together with other hedging strategies to enhance the hedging performance. Meanwhile, it become practical and essential when some of the underlying assets are illiquid or even not ...