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Fontier in QF
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blog by Ernie Chan
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My M.S thesis on Quantifying the Interest Risk of Bonds by Simulation.

Chapters include: Intro. to bonds and risk in bond investments; Intro. to interest rate models (equilibrium, no arbitrage models).

Short rate simulation, parameter estimation (MLE), bond pricing and risk simulation principles are explained in detail for Vasicek, CIR, Hull-White, CIR++ and Two Factor Vasicek (both no-arbitrage and equilibrium) models.

Empirical comparison of these models for quantifying the risk is made using US, German and Canadian bond market data.

Çağatay Dağıstan.
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by P. A. Forsyth, K. R. Vetzal
Abstract. The convergence of a penalty method for solving the discrete regularized American option valuation problem is studied. Sufficient conditions are derived which both guarantee convergence of the nonlinear penalty iteration and ensure that the iterates converge monotonically to the solution. These conditions also ensure that the solution of the penalty problem is an approximate solution to the discrete linear complementarity problem. The efficiency and quality of solutions obtained using the implicit penalty method are compared with those produced with the commonly used technique of handling the American constraint explicitly. Convergence rates are studied as the timestep and mesh size tend to zero. It is observed that an implicit treatment of the American constraint does not converge quadratically (as the timestep is reduced) if constant timesteps are used. A timestep selector is suggested which restores quadratic convergence. Key words. American option, penalty iteration, linear complementarity



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Min Dai
Hoi Ying Wong
Yue Kuen Kwoky
Abstract. The lookback feature in a quanto option refers to the payo structure where the terminal payo of the quanto option depends on the realized extreme value of either the stock price or the exchange rate. In this paper, we study the pricing models of European and American lookback option with the quanto feature. The analytic price formulas for two types of European style quanto lookback options are derived. The success of the analytic tractability of these quanto lookback options depends on the availability of a succinct analytic representation of the joint density function of the extreme value and terminal value of the stock price and exchange rate. We also analyze the early exercise policies and pricing behaviors of the quanto lookback option with the American feature. The early exercise boundaries of these American quanto lookback options exhibit properties that are distinctive from other two-state American option models.

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