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UnRisk: Finance@Court
Andreas Binder

Municipalities would do well to analyze payoffs and the risk of swaps before taking a leap with taxpayers' money...

Low Strike Extrapolation for SABR - d-fine
Sebastian Schlenkrich, André Miemiec, Tilman Wolff-Siemssen, d-fine GmbH, Frankfurt, Germany

In this paper we analyse the modelling of rate options in a low interest rate market environment. In particular, the pricing of low, zero and negative strike vanilla options is considered. We review the modelling approaches available in the literature. For the important special case of the widely used SABR formula we illustrate the shortcomings connected with the low strike wing of the smile.

Moreover, a simple approach of low strike extrapolation will be presented. It is based on gluing the density function implied by the standard SABR formula to a suitable density function at low strikes in an arbitrage free manner. This approach yields a robust and transparent method to price low, zero and negative strike vanilla options.

Internal LGD Estimation in Practice: Wilmott Magazine Article
Peter Glößner, Achim Steinbauer, Vesselka Ivanova 1622 Views

Driven by a competitive market and motivated by the new Basel Capital Accord (Basel II), banks have put a lot of effort into development and improvement of their methods to assess the creditworthiness of their obligors and to deduce the probability of default (PD). However, not only the probability of default but also the economic loss in the case of default have to be estimated to quantify credit risk and to calculate the Basel II capital requirements under the advanced approach.

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