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UnRisk: Finance@Court
Andreas Binder

Municipalities would do well to analyze payoffs and the risk of swaps before taking a leap with taxpayers' money...

Low Strike Extrapolation for SABR - d-fine
Sebastian Schlenkrich, André Miemiec, Tilman Wolff-Siemssen, d-fine GmbH, Frankfurt, Germany

In this paper we analyse the modelling of rate options in a low interest rate market environment. In particular, the pricing of low, zero and negative strike vanilla options is considered. We review the modelling approaches available in the literature. For the important special case of the widely used SABR formula we illustrate the shortcomings connected with the low strike wing of the smile.

Moreover, a simple approach of low strike extrapolation will be presented. It is based on gluing the density function implied by the standard SABR formula to a suitable density function at low strikes in an arbitrage free manner. This approach yields a robust and transparent method to price low, zero and negative strike vanilla options.

History of Monte Carlo Methods - Palisade Conference: Audio Podcast
Paul Wilmott 5419 Views

Earlier this year, Paul Wilmott gave the keynote speech at the Palisade Conference in exotic Heathrow (Monte Carlo itself has gone terribly downmarket of late, dahlings).

This speech is now available as an audio podcast. Palisade incorporate Monte Carlo simulation tools as part of their powerful risk analysis software.

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