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08:50 - 10:40: Massimo Morini: Head of Credit Models Banca IMI |
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Solving The Puzzles In Interest Rates, Funding and CVA
- Multiple Curves in an Interest Rate Market with collateral, liquidity and CVA
- Explaining and Modelling Basis Swap Spreads as credit and liquidity options
- Bridging the gap between standard theory and real FRAs and Swaps
- Mathematical modelling of EONIA collateralized derivatives tied to risky Libor
- Charging Funding Liquidity without double counting with counterparty risk
- Funding Spread and Bond Basis for the measurement of the real Cost of Funding
Break: 10:40 - 11:00
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11:00 - 12:30: Fabio Mercurio: Senior Researcher, Bloomberg LP, New York | |
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LIBOR Market Model with Stochastic Basis
- Stylized facts of the interest rate market
- Using distinct curves for generating future LIBOR rates and for discounting
- Pricing of linear and plain-vanilla interest rate derivatives
- Extending the LMM to the multi-curve case
- Modeling stochastic basis
- Deriving closed-form formulas for caps and swaptions
- An example of calibration to market data
Lunch: 12:30 - 13:50
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13:50 - 15:10: Dherminder Kainth: Head of QuaRC, Royal Bank Of Scotland | |
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Modelling CMS & Spread Options
- Issues with SABR for extrapolation and resolutions
- Introduction to Spread options:
Survey of market pricing approaches
Insights from copula based pricing models - disconnect between markets ?
- Pricing within cheyette
Break: 15:10 - 15:30
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15:30 - 16:50: María Teresa Martínez: Senior Interest Rate and Hybrids Quant, Santander | |
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Construction of an Arbitrage Free Smile, with Particular Application to CMS and Range Accrual Based Products
- The importance of a safe smile: due to the post-crisis market conditions, there is great interest in not so complex “exotic” products such as digital payoffs (e.g. range accruals) or CMS products, with exposure to the smile shape and high dependence of the absence of arbitrage of the vol curve. Also, the use of Markov functional type models requires of well defined smiles for all strikes, with no arbitrage. Our aim is to present a way of generating the smile without arbitrages for all strikes.
- The classic smile definition: SABR. The standard for smile generation is the celebrated formula by Hagan et. al, that presents two main drawbacks regarding our objective: one can easily find arbitrages in the smile, especially in the left hand wing, and the extrapolated volatilities for high strikes are usually far from the market implied volatilities.
- Some proposals: SABR near the forward, and prime extrapolation in far away strikes (Benaim, Dogson, Kainth), strike dependent SABR parameters, mixture of CEV processes (Rebonato). With the first two, the problem of the arbitrageability of the vol curve still can exist. The third one is safer in this sense, and our proposal is in the line of this result.
- Our proposal: we propose to approximate SABR vol curve with a mixture of two CEV processes, with appropriate parameter choice so that the new vol curve approximates SABR one near the forward, and has a handy way of controlling the wings of the distribution, by means of the weighting parameter.
- Applications: the extra degree of freedom given by this weighting parameter (that affects mainly to the right extreme of the smile) can be used to match CMS swaps market. This allows us to combine quoted swaption volatilities and CMS swap prices to construct an arbitrage free smile for a full range of strikes.
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16:50 - 18:00: Open Floor Q&A Session | |
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Open Floor Q&A Session:
Interest Rate Modelling Panel: Interest Rate Models and the crisis
Moderator: Fabio Mercurio
Panelists:
- Jesper Andreasen
- Eric Benhamou
- Massimo Morini
- Manuel Torrealba
Panel Topics:
- Eonia, Repo or Libor? The effects of funding and collateral on interest rate derivatives.
- Basis Spreads. Are we in a new rate-credit-liquidity hybrid market?
- BGM and Hull&White. Updating our models to post-crisis reality.
- How to improve the implied volatility asymptotic approximations.
- Local/Stochastic Volatility Models: alternatives to SABR? Cheyette models: alternatives to BGM?
- CMS and CMS Spread Option Pricing. Changes in the market and model advances
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20:00: Gala Dinner: Posada de la Villa Restaurant | |
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