913 research outputs found
CALLABLE SWAPS, SNOWBALLS AND VIDEOGAMES
Although economically more meaningful than the alternatives, short rate models have been dismissed for financial engineering applications in favor of market models as the latter are more flexible and best suited to cluster computing implementations. In this paper, we argue that the paradigm shift toward GPU architectures currently taking place in the high performance computing world can potentially change the situation and tilt the balance back in favor of a new generation of short rate models. We find that operator methods provide a natural mathematical framework for the implementation of realistic short rate models that match features of the historical process such as stochastic monetary policy, calibrate well to liquid derivatives and provide new insights on complex structures. In this paper, we show that callable swaps, callable range accruals, target redemption notes (TARNs) and various flavors of snowballs and snowblades can be priced with methods numerically as precise, fast and stable as the ones based on analytic closed form solutions by means of BLAS level-3 methods on massively parallel GPU architectures.Interest Rate Derivatives; stochastic monetary policy; callable swaps; snowballs; GPU programming; operator methods
Interest rate models with Markov chains
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Accelerating Reconfigurable Financial Computing
This thesis proposes novel approaches to the design, optimisation, and management of reconfigurable
computer accelerators for financial computing. There are three contributions. First, we propose novel
reconfigurable designs for derivative pricing using both Monte-Carlo and quadrature methods. Such
designs involve exploring techniques such as control variate optimisation for Monte-Carlo, and multi-dimensional
analysis for quadrature methods. Significant speedups and energy savings are achieved
using our Field-Programmable Gate Array (FPGA) designs over both Central Processing Unit (CPU)
and Graphical Processing Unit (GPU) designs. Second, we propose a framework for distributing computing
tasks on multi-accelerator heterogeneous clusters. In this framework, different computational
devices including FPGAs, GPUs and CPUs work collaboratively on the same financial problem based
on a dynamic scheduling policy. The trade-off in speed and in energy consumption of different accelerator
allocations is investigated. Third, we propose a mixed precision methodology for optimising
Monte-Carlo designs, and a reduced precision methodology for optimising quadrature designs. These
methodologies enable us to optimise throughput of reconfigurable designs by using datapaths with
minimised precision, while maintaining the same accuracy of the results as in the original designs
Real Option Valuation of a Portfolio of Oil Projects
Various methodologies exist for valuing companies and their projects. We address the problem of valuing a portfolio of projects within companies that have infrequent, large and volatile cash flows. Examples of this type of company exist in oil exploration and development and we will use this example to illustrate our analysis throughout the thesis. The theoretical interest in this problem lies in modeling the sources of risk in the projects and their different interactions within each project. Initially we look at the advantages of real options analysis and compare this approach with more traditional valuation methods, highlighting strengths and weaknesses ofeach approach in the light ofthe thesis problem. We give the background to the stages in an oil exploration and development project and identify the main common sources of risk, for example commodity prices. We discuss the appropriate representation for oil prices; in short, do oil prices behave more like equities or more like interest rates? The appropriate representation is used to model oil price as a source ofrisk. A real option valuation model based on market uncertainty (in the form of oil price risk) and geological uncertainty (reserve volume uncertainty) is presented and tested for two different oil projects. Finally, a methodology to measure the inter-relationship between oil price and other sources of risk such as interest rates is proposed using copula methods.Imperial Users onl
Assessing Credit with Equity: A CEV Model with Jump to Default
Unlike in structural and reduced-form models, we use equity as a liquid and observable primitive to analytically value corporate bonds and credit default swaps. Restrictive assumptions on the firmĆ¢s capital structure are avoided. Default is parsimoniously represented by equity value hitting the zero barrier. Default can be either predictable, according to a CEV process that yields a positive probability of diļ¬usive default and enables the leverage eļ¬ect, or unpredictable, according to a Poisson-process jump that implies non-zero credit spreads for short maturities. Easy cross-asset hedging is enabled. By means of a carefully specified pricing kernel, we also enable analytical credit-risk management under possibly systematic jump-to-default risk.Equity, Corporate Bonds, Credit Default Swaps, Constant-Elasticity-of-Variance (CEV) Diffusion, Jump to Default
Efficient hierarchical approximation of high-dimensional option pricing problems
A major challenge in computational finance is the pricing of options that depend on a large number of risk factors. Prominent examples are basket or index options where dozens or even hundreds of stocks constitute the underlying asset and determine the dimensionality of the corresponding degenerate parabolic equation. The objective of this article is to show how an efficient discretisation can be achieved by hierarchical approximation as well as asymptotic expansions of the underlying continuous problem. The relation to a number of state-of-the-art methods is highlighted
mlOSP: Towards a Unified Implementation of Regression Monte Carlo Algorithms
We introduce mlOSP, a computational template for Machine Learning for Optimal
Stopping Problems. The template is implemented in the R statistical environment
and publicly available via a GitHub repository. mlOSP presents a unified
numerical implementation of Regression Monte Carlo (RMC) approaches to optimal
stopping, providing a state-of-the-art, open-source, reproducible and
transparent platform. Highlighting its modular nature, we present multiple
novel variants of RMC algorithms, especially in terms of constructing
simulation designs for training the regressors, as well as in terms of machine
learning regression modules. At the same time, mlOSP nests most of the existing
RMC schemes, allowing for a consistent and verifiable benchmarking of extant
algorithms. The article contains extensive R code snippets and figures, and
serves the dual role of presenting new RMC features and as a vignette to the
underlying software package.Comment: Package repository is at http://github.com/mludkov/mlOS
High dimensional American options
Pricing single asset American options is a hard problem in mathematical finance. There are no closed form solutions available (apart from in the case of the perpetual option), so many approximations and numerical techniques have been developed. Pricing multiāasset (high dimensional) American options is still more difficult.
We extend the method proposed theoretically by Glasserman and Yu (2004) by employing regression basis functions that are martingales under geometric Brownian motion. This results in more accurate Monte Carlo simulations, and computationally cheap lower and upper bounds to the American option price. We have implemented these models in QuantLib, the openāsource derivatives pricing library. The code for many of the models discussed in this thesis can be downloaded from quantlib.org as part of a practical pricing and risk management library.
We propose a new type of multiāasset option, the āRadial Barrier Optionā for which we find analytic solutions. This is a barrier style option that pays out when a barrier, which is a function of the assets and their correlations, is hit. This is a useful benchmark test case for Monte Carlo simulations and may be of use in approximating multiāasset American options. We use Laplace transforms in this analysis which can be applied to give analytic results for the hitting times of Bessel processes.
We investigate the asymptotic solution of the single asset BlackāScholesāMerton equation in the case of low volatility. This analysis explains the success of some American option approximations, and has the potential to be extended to basket options
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