Financial Models in Production

verfasst von: Dr. Othmane Kettani, Dr. Adil Reghai

Verlag: Springer International Publishing

Buchreihe : SpringerBriefs in Finance

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Technik" , Springer Professional "Wirtschaft"

Einloggen, um Zugang zu erhalten

Über dieses Buch

This book provides a hands-on guide to how financial models are actually implemented and used in practice, on a daily basis, for pricing and risk-management purposes. It shows how to put these models into use in production while minimizing the cost of implementation and maximizing robustness and control. Addressing some of the most important and cutting-edge issues, it describes how to build the necessary models in order to risk manage all the costs involved in options fabrication within the world of equity derivatives and hybrids. This is achieved by extending classical models and improving them in order to account for complex features.

The book is primarily aimed at market practitioners (traders, risk managers, risk control, top managers), as well as Masters students in Quantitative/Mathematical Finance. It will also be useful for instructors hoping to enrich their courses with practical examples. The prerequisites are basic stochastic calculus and a general knowledge of financial markets and financial derivatives.

Inhaltsverzeichnis

Frontmatter

1. General Introduction

Abstract

This general introduction highlights the role of the quants and the main challenges they have to overcome when pricing financial derivatives. We state the main equation driving the economics of the quant role and give a detailed explanation of each term it contains. We also clarify the material that the reader may find in this book as well as the prerequisites needed to understand its content.

Othmane Kettani, Adil Reghai

2. Black & Scholes (BS) Model

Abstract

The Black & Scholes model is still topical in the market finance industry. The price of a European option is yet computed with a simple closed-form expression that depends on market observables. In this chapter, we do not present this model but rather focus on how it is used nowadays in production. That is to say, how practitioners use it to imply volatilities from market quotes. We revisit the closed-form formula and present a different methodology to compute it in order to overcome the numerical challenges inherent to volatility implicitation. Building on that, we explain why the Black & Scholes model fails in pricing and risk managing financial derivatives, while still being consistent with the market, and present an alternative model, at the end of the chapter, to construct a flexible and consistent market smile.

Othmane Kettani, Adil Reghai

3. Local Volatility Model

Abstract

In this chapter, we start first by presenting some typical properties of the local volatility surface, namely: the At-The-Money volatility, skew and curvature. We then move on to the implied volatility dynamics embedded in the local volatility model. We introduce the dynamic of the smile through the Skew Stickiness Ratio (SSR ratio) and lay out a methodology for its computation. The end of the chapter is devoted to the P&L explanation process and the testing of its underlying assumptions (i.e. Delta and Vega hedged positions) through well-chosen scenarios.

Othmane Kettani, Adil Reghai

4. Market Model P&L Explain

Abstract

“No LSV model, No problem”. How does that sound? Dear reader, leveraging on the P&L equation of Chap. 3, we show how you may still price exotic equity derivatives using the Local Volatility model. This is achieved by adding an adjustment to the price of the derivative in order to account for complex features embedded in the payoff. We focus essentially on the vanna cost, and study the Autocall in its prototypical form, with annual recalls and a European Down-and-In put option at maturity.

Othmane Kettani, Adil Reghai

Backmatter

Titel: Financial Models in Production
verfasst von: Dr. Othmane Kettani
Dr. Adil Reghai
Verlag: Springer International Publishing
Electronic ISBN: 978-3-030-57496-3
Print ISBN: 978-3-030-57495-6
DOI: https://doi.org/10.1007/978-3-030-57496-3