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Category Archives: Derivatives

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TARF PSR PFE Exposure calculation model

TARF PSR PFE Exposure calculation model Pre-settlement Risk (PSR) & Potential Future Exposure (PFE) are calculated to assess counterparty credit risk for derivative transactions. PSR calculates the risk of a counterparty default at a static point in time while PFEs assess the risk over the

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Excel convergence hacks for TARF pricing models

Excel convergence hacks for TARF pricing models. Convergence between closed form and simulation model prices is enhanced with variance reduction procedures. It encourages model extension to complex products. For our TARF pricing model in its original form convergence is a challenge. We will try and

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The case for participating forwards

The case for participating forwards This week we took a deep look at a number of common structured products and their hedge effectiveness. One product stood out in terms of its performance – the unconventional participating forward contract. Traditionally when we look at hedging structures

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FX Currency Options – The USD JPY FX options convention

USD JPY FX options convention. For business school students taking the treasury product exam or preparing for a trading desk interview, the USD JPY pair is particularly troublesome. Here is a list of common errors and challenges side by side with four simple examples for

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TARF hedge effectiveness model

TARF Hedge effectiveness model. This is our second post in the TARF hedge effectiveness series and in the treasury candidates assessment series case. To catch up with the case please see the original TARF case study that defines the client requirement as well as available

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Bootstrapping the Zero Curve and Forward Rates

Deriving zero rates and forward rates using the bootstrapping process is a standard first step for many valuation, pricing and risk models. Interest rate and cross currency swaps & interest rate options pricing & VaR models, revolving credit facilities & term B loans valuation models,

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Hedging Vega and Gamma exposure. Lesson Five

Hedging portfolio Vega and Gamma using solver. Lesson Five For our portfolio model we need an objective function that allows us to minimize the cumulative Greek gap across maturity buckets with respect to Vega and Gamma between the short positions and the proposed hedge portfolio.

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Option Greeks. Using Solver to hedge Vega Gamma exposure

Option Greeks. Option Hedging using Excel. Since a spot, forward or future position is linear in its pay off it has no second order derivative. Options on the other hand are non-linear (asymmetric payoffs). While we can get away with hedging Delta with a linear

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