, 86,103, 106, 157,205,206,207,208,209,224,280,281,282,327,331, 340, 341,351,352,356,357,358, 359, 360,361,362,364,366, 367,369,371,373,376spread risk, 73,281credit benefit, 11, 13, 14, 15, 16,17, 19, 21, 22, 23, 24, 25, 26,27,368,369,375,384credit charge, 10, 11, 12, 13, 14,15, 16, 17, 21, 22,23,25,26,27,28,29,35,39,48,73, 155, 199,204,327,351,352,359,365,366,369, 372, 373, 374, 375,371,384,385credit charge calculation, 352, 372,374,377
493
Index
credit cost, 14, 15, 16, 17, 19,21,24,25,26,27,28credit derivatives, 10, 21, 30, 35,50, 73, 82, 154, 180, 205, 328,332,380credit hybrid derivatives, 82, 3 12,334credit premium, 11, 12, 13, 33,48,365,370credit spread market model, 352cross Gamma, 50, 63, 118cross-currency, 20, 83, 101, 133,152,204,266,312,313,341
defaultloss, 18, 19,20,26,31,38,331,336,341,362,369options, 10, 11, 13,22,28, 35,208, 327, 349, 351, 362, 363,365,368,370,380default contingent instruments,33 1,335,336,337,352,353,362default protection, 20,21,22, 24,28,334,335,356defaultable derivatives, 21,35, 37,152,327,334,335,345Delta, 23,41,45, 50, 57, 58, 63,94, 115, 116, 117, 118, 150, 151,152,384dividend yield, 96,97dollar value of convexity, 440,442
Europeancall option, 148, 149, 187put option, 191swaption, 53,54, 115,216,221,226,228,231,251,265,268,270,272, 279,289,
290,291,306, 307,308,310,311,316exotic derivatives, 41,50,56,67,68,200,20 1,202,203,281,308,309,313,373exponential basis functions, 400,401,402
II
F
II
floating bond, 28,70,7 1,260,261floor, 74,76,78, 80, 81, 263,266,269,273,274,289,290,307,308floorlet, 250,258,263,264,269,300foreign exchange, 62, 134, 136foreign exchange rate, 134, 136forwardcontract, 34,96, 142,395measure, 162, 167,295,331price, 99, 114, 125, 138, 144,147,267,379,396swap rate, 99, 106, 114, 125,249,250,268,269,270,271,275,276,277,278forward swap, 99, 106, 114, 125,249,250,266,268,269,270,271,275,276,277,278,395funded trading, 27, 33, 314funding rate, 13, 16,46,74, 281,282,314funding spread, 11, 16,29,50,68,69,70,71,73, 121, 145,280,281,371,376,384futures contract, 23,99, 391, 392,393,406,407,408,426,432,433,459,466FX, 41,51,62,66, 67,79, 80, 81,82, 103, 122, 133, 134, 135, 136,145, 150, 154, 157, 167, 180,181, 185, 186, 187,287,312,313,341,342,364
494
Index
Gamma,45,50,63,115,116,117,118,366,369
LGD (loss given default), 18, 35,
Gaussianvariable, 350,351Greeks, 41,153
LIB ORcredit quality, 13,14,15,16,22,
38,39,327,335,34123,26,28,379market model, 160,167,183,
Harrison-Pliska no-arbitragetheorem, 96,97,98,106,259hedging calibration, 58,59,217hedging strategy, 23,39,41,42,45,71,72,88, 117,118,150,203,
250,251,258,259,261,273,279,280,282,283,284,286,292,297,300,301,302,303,307,317,318,319,323,326rate, 66,78,119,249,250,261,300,379,392,394,406,407
411,412,421,422,424historical correlation, 54,380,422,
429HJM framework, 221,253hybrid derivative, 12,21,41,54,
55,75,79,82,155,312
market risks, 35,82,328,448Markov chain model, 335,336,
339,340,348Markovian, 212,217,222,223,
224,226,228,231,234,251,258,293importance sampling, 112,155,
159,336in the money, 14,17,20,23,24,
81,269inflation linked debt issuance, 454inflation linked instrument, 453,
459inflation swap, 450,451,452,453,
454,455,456,457,458,459,460interest rate modeling, 186,204,212,236,237
JLT risk neutralization of creditrating transition, 207jump model, 54, 106,253,313,347
martingalearbitrage modeling, 37,89,101control variate, 54,154,156,
249,372credit spread model, 352,359equivalent martingale measure,
37,90,91,98,124examples of, 101Harrison-Pliska martingale noarbitrage theorem, 37,89,90,
95,101,108,113,329,353interpolation, 155,161,162,
167,204,250,273,279,301,340representation theorem, 89,101,102,108,124,261,270,358,360resampling, 154,155, 157,158,159,160,162,180,181,182,184,185, 186,187,192,193,
495
Index
195, 196, 198,200,201,203,204, 205, 211,217, 249,267,280,282, 292, 301, 302, 303,307, 316, 340, 361, 374, 380,382maximum likelihood, 404maximum potential exposure, 32modelaffine, 215,216BDT, 215,227BGM, 157,199,201,209,217,249,251, 256,279, 280,287,306,314,316,361BGM/J, 153, 155, 199,204,249,250,251,256,258,288,290, 291,292,293,295,301,303BK, 215Blacks, 143,358Black-Scholes, 60, 124, 142, 350full yield curve, 153, 157, 187,201,214,217,218Gaussian, 216Ho-Lee, 214Hull-White, 214, 223, 227, 228IK, 230,231,233,234,242,246interest rate market, 208, 249,301,361Markov chain, 335,336,339,340,348Markovian, 293orthogonal exponential spline,398,441quadratic, 2 15replication, 147, 148, 149RS, 224,225,226,227,228,229,23 1,232,234, 241,242,248SABR, 118, 119,133,148,150,152,216,250,279, 280,282,291,315swap market, 250, 251,259,270,273,352
two-factor risk, 406,464Vasicek, 223model calibrationprimary model calibration, 53,54,217secondary model calibration, 41,51,54,55,56,58,59,202,203,217,280,282,308,313models for hedging, 283Monte Car10 simulation, 89, 109,112, 126, 153, 154, 156, 159,168, 174, 180, 210,280,282,292,303,307, 309,310,316,336,364,380,381mutual terminationagreement, 31options, 30
NBT (nonexploding bushy tree),159, 236, 249,251,252, 280,282,290,291,293,294,295,296,297,300,301,303,304,306,307,308, 309,3 10,311,312,317,318, 319,320,322,323net credit charge, 11, 12, 13, 28,29, 30,48, 370,371,384no-arbitrage pricing, 39non-arbitrage models, 61non-Markovian, 115,208,212,222,223,251,293note and bond futures, 393numerairechange of, 109multiple, 124, 133, 152single, 124, 135, 144
orthogonal exponential splinemodel, 441
496
Index
quasi-arbitrage opportunities, 87P&L (profit & loss), 22, 29,41, 55,58,60, 113, 115, 116, 117, 118,152,201,434,438par coupon, 11,28,74,268,281,331,356,379,456,457,465par swap, 28,74,268,379,459payer swap, 69,72,73,267,268,270,272, 291, 292, 309, 310,374payer swaption, 268,270, 272, 291,292,309,310,374PCA (principal componentanalysis), 413PDE (partial differential equation),109PE (potential exposures), 32,366,367maximum, 32MPE, 32plain vanilla option, 41potential exposure, 32, 366, 367PRDC (power reverse dualcurrency), 80, 81, 82, 135,216,281,312primary model calibration, 53, 54,217probability measurechange of, 37,89, 109, 110, 111,112, 122, 124, 129, 137, 138,139, 140, 145,284,333, 347,356,357,358,384equivalent martingale, 37, 90,91,98, 124put-call parity, 13,48, 122, 144,147, 191, 197, 301, 302, 306,307,311put-call parity revised, 123, 146
quadratic model, 215
Radon-Nikodfm derivative, 100,110,137,185,283,323,354range accrual, 49, 75, 76, 78, 162,198,199,201,216,281real rate swap curve, 451,457,458receiver swap, 69, 70, 71, 72, 73,267,268,270,272,374receiver swaption, 268,270,272,374recovery rate modeling, 350replication model, 147, 148, 149repo, 15,25,26,46,47,48, 84,114, 121, 125, 379,435,436,438,460resampling techniqueskurtosis resampling, 168, 173quadratic resampling, 174, 175,176, 177, 178, 179,211ricldcheap analysis, 464,465,466,467right-way exposures, 33,34,35,83,348,363,366,369,383,384risk modeling, 334, 385risk neutral, 30, 37, 39, 40, 106,123,205,206,209,210,219,423,424,432valuation, 123risk-free interest rate, 37,45,46,48, 121risky market model for creditspread, 361
SABR stochastic volatility model,118, 119, 133, 148, 150, 152,216,250, 279, 280,282, 291,315
Index
SDE, 101,108,109,115, 138,141,215,216,290,300secondary model calibration, 41,51, 54,55, 56, 58,59, 202,203,217,280,282,308,313self financing trading strategy, 42SFTS, 42,43,44,45,46,60, 86,89,91,93, 94, 97, 117, 122,147short position, 26,41, 80, 81, 85,365,435short rate, 155, 157, 199, 212,213,214, 215, 217, 220,222,223,224,225,228,229,232,233,234,241,244,251,258,400,407short rate models, 155, 157, 199,213,214,217skew, 40,51,57,75,150,151,234,235,279,287,290,291,292,379smile, 40,52, 56, 58, 75, 150,204,279,287,350snowball, 76, 78,79, 312snowbear, 78spline model, 399,400,405,406,423,433spot price, 62, 185spread options, 433spread trade, 216stat arb (statistical arbitrage), 41,63,66, 87,434,439,462state dependent volatility, 123stochastic volatility, 54, 58, 59,102, 105, 118, 119, 133, 150,152, 159, 192,204,212,250,275,279,300,301,307,313,316stratified sampling, 155, 159, 174,177,336structured notes, 64,65,67,74,76,82,280,314
497
swap curve, 270,405,406,407,410,457,458,459,461,468,469swap rate, 184, 250, 269, 270, 272,273, 275,276, 277,279,301,315,394,395,407,408,409,451,455,456,457,458,459swaption, 12,53, 208, 252, 268,269,291,293,301,307,308,309,310,311, 312,316,317,351,357,359,361,380,395
TARN (target redamption), 78,79,81,216the bootstrap method, 399Theta, 115, 116, 117, 118, 366,369,459total rate of return, 438,443trading opportunities, 27,41,66,437,438Treasury bill, 46, 121, 389Treasury issue, 48, 101, 379trinomial tree, 171, 234, 235, 236,240,241,242,297applications of, 242recombining, 215, 224, 234,235,236,237,241,296two-factor risk model, 406,464
un-hedgeable variables, 5 1, 52, 54,56,59,60,63,64,66, 88, 89,283,308,313,314
VAR (value at risk), 32,45, 50, 63,89,174,385
498
Vega, 41,45,50,52,54,57,58,63,115, 117, 118, 150, 151, 152,199,203,282, 366, 369, 384,459volatilityskew, 37,40,51,52,54,57,58,60,75,76, 81, 88, 89, 103,118, 133, 147, 148, 150, 157,159, 192, 198,200, 201,202,203,204,209,212,215,216,217,228,232,250,279, 280,282,287,288,290,291,300,301,307,314, 316,343,350,384smile, 52,56,58, 102, 105, 133,150,215,250,287,313,314volatility adjusted duration, 43 1,432,441,445volatility skew and smile, 37,40,51,75,76, 118, 147, 148, 150,201,216,217,279,280,282,287
Index
wrong-way exposures, 33,34,35,49, 83,348,363,366, 369,383,384
yield curve modeling, 397yield decomposition, 440,448,455yield decomposition model, 440,448,455
zero-recovery swap, 20,282
This page intentionally left blank
<|end|>