Download Derivatives in Financial Markets with Stochastic Volatility by Professor Jean-Pierre Fouque, George Papanicolaou, K. Ronnie PDF

By Professor Jean-Pierre Fouque, George Papanicolaou, K. Ronnie Sircar

This significant paintings addresses difficulties in monetary arithmetic of pricing and hedging by-product securities in an atmosphere of doubtful and altering marketplace volatility. those difficulties are very important to traders from huge buying and selling associations to pension cash. The authors current mathematical and statistical instruments that take advantage of the risky nature of the industry. the maths is brought via examples and illustrated with simulations and the modeling procedure that's defined is verified and established on industry information. the cloth is appropriate for a one-semester path for graduate scholars with a few publicity to equipment of stochastic modeling and arbitrage pricing conception in finance. the quantity is definitely available to derivatives practitioners within the monetary engineering undefined.

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Extra resources for Derivatives in Financial Markets with Stochastic Volatility

Example text

Suppose the first bond portfolio has 45% in both the 5-year and 20-year bonds and 10% in the 10-year bond. Suppose that the second bond portfolio has 5% in both the 5-year and 20-year bonds and 90% in the 10-year bond. It is not difficult to understand that the way in which interest rates change on the yield-curve can have a substantially different impact on the change in these two bond portfolios. , movement) of the yield-curve. There are various measures that have been suggested for quantifying a portfolio's exposure to changes in the yield-curve.

The impact of such activity on the investor's position is obvious: The firm can redeem at or near par many of the bonds that appear to be protected from call and that have a market value above the face value of the debt. Put Provisions A putable bond grants the investor the right to sell the issue back to the issuer at par value on designated dates. The advantage to the investor is that if interest rates rise after the issue date, thereby reducing the value of the bond, the investor can force the issuer to redeem the bond at par.

Interest accrues at 0% for each day that three-month LIBOR is outside this range. As a result, this range note has a floor of 0%. PART 1 8 Background Structures in the high-yield (junk bond) sector of the corporate bond market have introduced variations in the way coupon payments are made. For example, in a leveraged buyout or recapitalization financed with high-yield bonds, the heavy interest payment burden the corporation must bear places severe cash-flow constraints on the firm. To reduce this burden, firms involved in leveraged buyouts (LBOs) and recapitalizations have issued deferred-coupon structures that permit the issuer to defer making cash interest payments for a period of three to seven years.

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