Download Applications of Arbitrage-free Models New Frontiers in Interest Rate, Credit and Energy Risks PDF

TitleApplications of Arbitrage-free Models New Frontiers in Interest Rate, Credit and Energy Risks
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Total Pages43
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Document Text Contents
Page 1

T H O M A S S . Y . H O P h D
P R E S I D E N T

T H C
O C T O B E R 2 6 , 2 0 0 9

T O M . H O @ T H O M A S H O . C O M

Applications of Arbitrage-free Models:
New Frontiers in Interest Rate, Credit and
Energy Risks
Third Annual Bloomberg Lecture in Finance

Page 2

Valuation models
 Derivative pricing (relative valuation) under interest rate, credit and

other risk drivers

Applications
 Trading
 Portfolio management
 Enterprise risk management

Impacts on the markets
 Price discovery process
 Regulatory policies in the financial markets

2/14/16Introduction

2

Arbitrage-free Term Structure Models

Page 21

2/14/16Applications: Energy Risk Modeling

21

Henry Hub $ MMBtu (12/12/05-8/7/09)

0

2

4

6

8

10

12

14

16

18

Page 22

2/14/16Applications: Energy Risk Model

22

Term Structure of Henry Hub Futures Prices
10/16/2009

4

4.5

5

5.5

6

6.5

7

7 .5

8 Futures Prices

Page 42

Trading
 Return attributions on performance measure

Model risk
 Statistical Approach: explanatory, mean reversion, replication

Securities valuation
 Interest rate, default rate, inflation rate, liquidity, cost to carry
 Hybrid models

Identifies the price formation process
 From the basic valuation building blocks to exotic structures
 Regulatory policy on market transparency and the role of exchanges

2/14/16Conclusions

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Conclusions and Implications

Page 43

Amin, Kaushik I., and Andrew J. Morton, 1994, “ Implied Volatility Functions in Arbitrage-free Term Structure Models, “ Journal of Financial Economics, 35
(2), 141-180

Benth, Fred Espen, Lars Ekeland, Ragner Hauger and Bjorn Fredrik Nielsen 2003 “A Note on Arbitrage-free Pricing of Forward Contracts in Energy Market”
Applied Mathematical Finance 10, 325-336

Eydeland, Alexander and Krzysztof Wolyniec 2003 Energy and Power Risk Management, Wiley Finance
Harrison, J Michael, and David M. Kreps, 1979 “Martingales and Arbitrage in Multiperiod Securities Markets<” Journey of Economic Theory, 20(3), 381-408
Ho, Thomas S. Y. 1992 “Key rate durations: measures of interest rate risks” Journal of Fixed-Income, 2(2), 19-44
Ho, Thomas S. Y. and Sang-Bin Lee 2003, The Oxford Guide to Financial Modeling, Oxford University Press
Ho, Thomas S. Y. and Sang-Bin Lee 1986, “Term Structure Movements and the Pricing of Interest Rate Contingent Claims,” Journal of Finance, 41 (5), 1011-

1029
Ho, Thomas S. Y. and Sang Bin Lee,2009 “ Valuation of Credit Contingent Claims: An Arbitrage-free Credit Model” Journal of Investment Management vol 7

No 5
Ho, Thomas S. Y. Ho and Sang Bin Lee, 2009 ”A Unified Credit and Interest Rate Arbitrage-Free Contingent Claim Model” Journal of Fixed-Income
Ho, Thomas S. Y. and Blessing Mudavanhu,2007 “Stochastic Movement of the Implied Volatility Function” Journal of Investment Management 4 th quarter
Ho, Thomas S. Y. and Sang Bin Lee, 2007 ““Generalized Ho-Lee Model: A Multi-factor State-Time Dependent Implied Volatility Function Approach” Journal

of Fixed Income 4th quarter
Ho, Thomas S. Y. 2007 “Managing Interest Rate Volatility Risk: Key Rate Vega” Journal of Fixed Income 4 th quarter
Ho, Thomas S. Y. and Sang-Bin Lee 2009 “ A Unified Model: Arbitrage-free Term Structure Movements of Flow Risks
Ho, Thomas S. Y. and Sang Bin Lee “ Pricing of Contingent Claims on Natural Gas” working paper
Nawalkha, Sanjay K., Natalia A. Beliaeva and Gloria M Soto 2007 Dynamic Term Structure Modeling Wiley Finance

2/14/16References

43

References

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