On the application of Wishart process to the pricing of equity derivatives: the multi-asset case

Given the inherent complexity of financial markets, a wide area of research in the field of mathematical finance is devoted to develop accurate models for the pricing of contingent claims. Focusing on the stochastic volatility approach (i.e. we assume to describe asset volatility as an additional stochastic process), it appears desirable to introduce reliable dynamics in order to take into account the presence of several assets involved in the definition of multi-asset payoffs. In this article we deal with the multi asset Wishart Affine Stochastic Correlation model, that makes use of Wishart process to describe the stochastic variance covariance matrix of assets return. The resulting parametrization turns out to be a genuine multi-asset extension of the Heston model: each asset is exactly described by a single instance of the Heston dynamics while the joint behaviour is enriched by cross-assets and cross-variances stochastic correlation, all wrapped in an affine modeling. In this framework, we propose a fast and accurate calibration procedure, and two Monte Carlo simulation schemes.

The Determinants of CoCo Bond Prices

This study aims to empirically test how contingent convertible (CoCo) bond prices are affected by the main theoretical determinants and design features. The theoretical framework used in this article is the Equity Derivatives Model suggested by De Spiegeleer and Schoutens (2012). The authors test for the relationship between CoCo prices and key variables suggested by this model. They find that the main determinants are mostly significant and that the explanatory power of the model is high with an R-squared of 86%. The power of the model is not affected by the loss absorption mechanism (conversion to equity or principal write-down). They also identify a number of additional explanatory variables of importance.

Part III Investment Banking, 14 Trading Book—Models

The key to market risk is the calculation of position risk requirement (PRR). Basel 3 has radically changed the approach to the calculation of position risk for regulated firms, and this chapter deals with the ‘before and after’ element to it. A firm must calculate a PRR in respect of all its trading book positions, all foreign exchange positions, and all positions in commodities (including physical commodities) whether or not in the trading book. A firm must also be able to monitor its total PRR on an intra-day basis. The remainder of the chapter covers trading book eligibility under Basel 2.5, trading and market exposures, equity PRR and basic interest rate PRR for equity derivatives, commodity PRR, foreign currency PRR, option PRR, credit derivatives, and underwriting positions.