Perhaps no other financial derivative instrument in history has generated so much buzz and debate as the credit default swaps (CDS) have in the last year or so. Traders, risk managers, regulators, U.S. Congressman, financial journalists, financial TV anchors…., almost everyone has been talking of CDS of late. It seems that today everyone believes – erroneously so, however – that all hell in the financial markets is breaking loose largel

     Black-Scholes model ，is very very famous in financial world . Risk free method is a very good way in derivative pricing . There is not only one way to derive BS model .

    http://www.math.ku.dk/~rolf/bsTHESIS.pdf

       汗……，幽默的语言，道出了真谛。

-----------------------------------------------------------------------------------------------------------

     现有一墙街(wall st)买买提基金公司和国营海淀区第一浆糊厂, 咱们做个比较看.
简单说说为啥我用捣浆糊来做比较, 浆糊一捣就一片馄饨, 捣快点那就是湍流, 那个可复杂了, 股票价格也差不多, 一团浆糊. 学术而言, 矿工们解的偏微分方程其实就是浆糊桶里的热传导方程和浆糊扩散方程. 瞧矿工们

Our previous article (What are weather derivatives?) explained the basic concept behind weather derivatives, the history of their upcoming, and uses as hedging instruments particular to the energy industry.   In this article, we shall concern ourselves with modelling temperature as the underlying variable for the weather derivatives.   Most common weather derivatives are written on temperature.

To aid the development of a reasonable model, one needs to look at

The weather has an enormous impact on businesses, for example, energy producing companies, travel agents and wine producers.   The weather affects each of these industries in different ways.   For example, a warm winter will reduce the profits of an energy producer, whereas a warm summer will produce better grapes wine producers.   In some situations `bad' weather can result in companies making a loss.   For this reason, a number of companies have

In a previous article we introduced the Firm value model for pricing credit risk. Re-stated briefly, this model assumes default to be triggered when the couterparty share price hits a prescribed low barrier. The classic Firm model (by Merton) only considers the counterparty share price at the maturity of the derivative (and neglects premature default). If the share price at maturity is below the default barrier the counterparty is deemed to be in a state of default. More recently, this

In this article we will cover the basics of credit risk (also known as default risk), it's   importance in financial modelling and the 2 main market techniques for incorporating credit risk into pricing options. We start right at the beginning by defining credit risk, then introducing some of the jargon used by credit risk analysts, before moving onto the modelling aspects.

What is credit risk? In short, it is the risk arising from the possibility of firms defaulting an

Following on from an earlier article, here we describe the first generation of interest rate modelling. This approach models the interest rate (or short rate) directly. In general, the short rate is assumed to follow some process:

The

This is the first of a series of articles that will tackle interest rate modelling in finance. Here, we introduce the important concepts relevant to the fixed income world, while later articles will emphasize more on the models that are available and their relative strengths and weaknesses.

In the deterministic world, interest rate is assumed to be fully defined. This is very convenient, because then expressions such as

In the Black-Scholes model, the volatility of the underlying asset is the only non-directly observable variable.   For this reason, it is necessary to devise some method where by one can estimate (efficiently) and possibly anticipate the volatility.   In a previous article, we have already discussed a rather popular method of deducing the implied volatility from the Black-Scholes model and option prices.   This method has an advantage over direct estimation