Option pricing with Lévy-Stable processes generated by Lévy-Stable integrated variance.

We show how to calculate European-style option prices when the log-stock price process follows a Lévy-Stable process with index parameter 1≤α≤2 and skewness parameter -1≤β≤1. Key to our result is to model integrated variance as an increasing Lévy-Stable process with continuous paths in ΤLévy-Stable processes; Stable Paretian hypothesis; Stochastic volatility; α-stable processes; Option pricing; Time-changed Brownian motion;

A matched asymptotic expansions approach to continuity corrections for discretely sampled options. Part 2: Bermudan options.

We discuss the `continuity correction' that should be applied to connect the prices of discretely sampled American put options (i.e. Bermudan options) and their continuously-sampled equivalents. Using a matched asymptotic expansions approach we compute the correction and relate it to that discussed by Broadie, Glasserman & Kou (Mathematical Finance 7, 325 (1997)) for barrier options. In the Bermudan case, the continuity correction is an order of magnitude smaller than in the corresponding barrier problem. We also show that the optimal exercise boundary in the discrete case is slightly higher than in the continuously sampled case

Electronic/electric technology benefits study

The benefits and payoffs of advanced electronic/electric technologies were investigated for three types of aircraft. The technologies, evaluated in each of the three airplanes, included advanced flight controls, advanced secondary power, advanced avionic complements, new cockpit displays, and advanced air traffic control techniques. For the advanced flight controls, the near term considered relaxed static stability (RSS) with mechanical backup. The far term considered an advanced fly by wire system for a longitudinally unstable airplane. In the case of the secondary power systems, trades were made in two steps: in the near term, engine bleed was eliminated; in the far term bleed air, air plus hydraulics were eliminated. Using three commercial aircraft, in the 150, 350, and 700 passenger range, the technology value and pay-offs were quantified, with emphasis on the fiscal benefits. Weight reductions deriving from fuel saving and other system improvements were identified and the weight savings were cycled for their impact on TOGW (takeoff gross weight) and upon the performance of the airframes/engines. Maintenance, reliability, and logistic support were the other criteria

Ray methods for Free Boundary Problems

We discuss the use of the WKB ansatz in a variety of parabolic problems involving a small parameter. We analyse the Stefan problem for small latent heat, the Black--Scholes problem for an American put option, and some nonlinear diffusion equations, in each case constructing an asymptotic solution by the use of ray methods

Nonclassical shallow water flows

This paper deals with violent discontinuities in shallow water flows with large Froude number $F$. On a horizontal base, the paradigm problem is that of the impact of two fluid layers in situations where the flow can be modelled as two smooth regions joined by a singularity in the flow field. Within the framework of shallow water theory we show that, over a certain timescale, this discontinuity may be described by a delta-shock, which is a weak solution of the underlying conservation laws in which the depth and mass and momentum fluxes have both delta function and step functioncomponents. We also make some conjectures about how this model evolves from the traditional model for jet impacts in which a spout is emitted. For flows on a sloping base, we show that for flow with an aspect ratio of \emph{O}($F^{-2}$) on a base with an \emph{O(1)} or larger slope, the governing equations admit a new type of discontinuous solution that is also modelled as a delta-shock. The physical manifestation of this discontinuity is a small `tube' of fluid bounding the flow. The delta-shock conditions for this flow are derived and solved for a point source on an inclined plane. This latter delta-shock framework also sheds light on the evolution of the layer impact on a horizontal base

On the pricing and hedging of volatility derivatives

We consider the pricing of a range of volatility derivatives, including volatility and variance swaps and swaptions. Under risk-neutral valuation we provide closed-form formulae for volatility-average and variance swaps for a variety of diffusion and jump-diffusion models for volatility. We describe a general partial differential equation framework for derivatives that have an extra dependence on an average of the volatility. We give approximate solutions of this equation for volatility products written on assets for which the volatility process fluctuates on a time-scale that is fast compared with the lifetime of the contracts, analysing both the ``outer'' region and, by matched asymptotic expansions, the ``inner'' boundary layer near expiry

Counterparty Credit Limits: An Effective Tool for Mitigating Counterparty Risk?

A counterparty credit limit (CCL) is a limit imposed by a financial institution to cap its maximum possible exposure to a specified counterparty. Although CCLs are designed to help institutions mitigate counterparty risk by selective diversification of their exposures, their implementation restricts the liquidity that institutions can access in an otherwise centralized pool. We address the question of how this mechanism impacts trade prices and volatility, both empirically and via a new model of trading with CCLs. We find empirically that CCLs cause little impact on trade. However, our model highlights that in extreme situations, CCLs could serve to destabilize prices and thereby influence systemic risk

A note on oblique water entry

An apparently minor error in Howison, Ockendon & Oliver (J. Eng. Math. 48:321–337, 2004) obscured the fact that the points at which the free surface turns over in the solution of the Wagner model for the oblique impact of a two-dimensional body are directly related to the turnover points in the equivalent normal impact problem. This note corrects some results given in Howison, Ockendon & Oliver (2004) and discusses the implications for the applicability of the Wagner\ud model

Option pricing with Lévy-Stable processes generated by Lévy-Stable integrated variance.

We show how to calculate European-style option prices when the log-stock price process follows a Lévy-Stable process with index parameter 1≤α≤2 and skewness parameter -1≤β≤1. Key to our result is to model integrated variance as an increasing Lévy-Stable process with continuous paths in ΤCommodity markets; Commodity prices; Lévy process; Hedging techniques;