2013
Our expertise of pricing vanilla and exotic derivatives revolves around three strategic areas:
The modeling of underlying processes is at the heart of |
A pricing model enables one to value a derivative and to implement a theoretical hedging strategy.
Nevertheless, the theory has to reflect the market reality where the mrket prices of the underlying do not follow the theoretical
laws of models. |
By implementing stress-tests, the analysis of risk factors has become a concern for investors.
But a post-evaluation of the risk does not help to avoid Black Swans.
At |
The Black and Scholes model established itself as a market standard for vanilla action derivatives.
Despite its well-known limits, such as a smile and a term structure of implied volatility, this model is still used
at the trading desks though thanks to some adjustments.
|
The subprimes mortgage crisis has allowed the introduction of CDO and ABS into the public stage which rapidly became “toxic” products.
Most of all, the crisis showed that there were no real concerns about potential future credit exposures because of simplistic models
which did not take into account systemic risk. In the context of new regulatory constraints, the first signs of concern about risk credit
are appearing. |
The liquidity of vanilla interest rate derivatives enabled the emergence of highly complex exotic interest rate derivatives.
There is no closed-form formula for these exotic derivatives, and the choice of a model for the dynamics of the yield curve is crucial
and must adapt to the characteristics of the product. |
Convertible bonds are hybrids which are both equity and credit derivatives. |
The market making of vanilla and exotic derivatives requires a perfect command of pricing and hedging models.
|
|
Structuring of complex derivatives requires a perfect command of pricing and of the chosen vanilla hedging products.
Nevertheless, the sum of vanilla products generally results in an exotic product where new risk factors emerge.
|
Long-Only investors used to base their approach on qualitative analysis of companies.
But systematic approaches such as Minimum Variance have proven their robustness in handling the whims of the markets.
|