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Study the impact of smile and tail dependence on the prices of European style bivariate equity and interest rate derivatives using Copulas and UVDD model

Chauhan, P. (2009) Study the impact of smile and tail dependence on the prices of European style bivariate equity and interest rate derivatives using Copulas and UVDD model.

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Abstract:After the introduction of Black’s formula in 1973 numerous attempts have been made to price options more realistically, efficiently and consistently with market observations. Although smile effects can be incorporated into pricing European style bivariate options by following well-known methodologies, tail dependence is often neglected. This could be due to little need or interest to introduce tail dependence in pricing models and the great complexity introduced by adding this extra feature. But after the recent Credit Crisis, which started in 2007, various researchers and institutions are turning back-to-basics by understanding and revising the assumptions made within a model and trying to develop alternative ways to price more realistically the products which are more sensitive to joint behavior of underlying assets. The integration of new features into the existing models is also very demanding as it challenges the current market practices. This thesis seeks to develop a better understanding of tail dependence and also volatility smile by studying its impact on the prices of some selected Equity and Interest rate derivates, and comparing the results with the existing models. It also explores the ways to successfully integrate these features into the existing models and practices
Item Type:Essay (Master)
Clients:
ING Bank
Faculty:EEMCS: Electrical Engineering, Mathematics and Computer Science
Subject:54 computer science
Programme:Applied Mathematics MSc (60348)
Link to this item:http://purl.utwente.nl/essays/59472
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