Putting the smile back on the face of derivatives
Cross-asset quadratic Gaussian models have been limited in the scale of their implementation by the difficulty in ensuring the correct drift conditions to omit arbitrage. Here, Paul McCloud shows how to exploit the symmetries of the functional form to solve this, and implements the model to price cliquets in the presence of significant skew in the smile
This article considers the exponential-quadratic Gaussian model, an extension of the familiar quadratic Gaussian model with application in the pricing of hybrid exotics. The principal attraction of the approach is its capacity to provide flexible smile behaviour in a multi-factor cross-asset term-structure setting, while retaining simple closed-form analytic expressions for the financial variables. The analysis combines the potential models originating in the work of Rogers (1997) with results
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Markets
Volatility selling is down, but not out
Shrinking risk premiums could end cycle of vol suppression, traders say – but not just yet
Futures gain ground in G10 FX pricing
Some market-makers believe contracts are now primary market price for Commonwealth currencies
AI ‘lab’ or no, banks triangulate towards a common approach
Survey shows split between firms with and without centralised R&D. In practice, many pursue hybrid path
Everything, everywhere: 15 AI use cases in play, all at once
Research is top AI use case, best execution bottom; no use is universal, and none shunned, says survey
Citi rolls out revamped SDP in emerging markets
Unified API will boost electronic pricing and automation for restricted currencies, says bank
HSBC appoints Benihasim as global FX head
Hong Kong-based Benihasim replaces Richard Bibbey, who moved to London to run institutional sales
BlackRock bucks trend in shrinking IRS market for Ucits
Counterparty Radar: Pimco boosts pay-fixed book by $27.5 billion in H1 2024
Hong Kong dealers make Honia transition push
Standard Chartered ramps up swaps quoting for Hibor alternative; calls for industry transition group
