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Note that whereas equity options are more commonly valued using other pricing models such as lattice based models, for path dependent exotic derivatives – such as Asian options – simulation is the valuation method most commonly employed; see Monte Carlo methods for option pricing for discussion as to further – and more complex – option ...
The binomial correlation approach of equation (5) is a limiting case of the Pearson correlation approach discussed in section 1. As a consequence, the significant shortcomings of the Pearson correlation approach for financial modeling apply also to the binomial correlation model. [citation needed]
The model was introduced by Fischer Black, Emanuel Derman, and Bill Toy. It was first developed for in-house use by Goldman Sachs in the 1980s and was published in the Financial Analysts Journal in 1990. A personal account of the development of the model is provided in Emanuel Derman's memoir My Life as a Quant. [4]
Because interest rate caps/floors are equivalent to bond puts and calls respectively, the above analysis shows that caps and floors can be priced analytically in the Hull–White model. Jamshidian's trick applies to Hull–White (as today's value of a swaption in the Hull–White model is a monotonic function of today's short rate).
Bond yields are hitting levels that signal markets are concerned that, even if the economy continues to grow, it could lead to a surge in inflation. What the recent tantrum in bonds says about ...
Binomial Lattice for equity, with CRR formulae Tree for an bond option returning the OAS (black vs red): the short rate is the top value; the development of the bond value shows pull-to-par clearly . In quantitative finance, a lattice model [1] is a numerical approach to the valuation of derivatives in situations requiring a discrete time model.
The "Fed model", or "Fed Stock Valuation Model" (FSVM), is a disputed theory of equity valuation that compares the stock market's forward earnings yield to the nominal yield on long-term government bonds, and that the stock market – as a whole – is fairly valued, when the one-year forward-looking I/B/E/S earnings yield equals the 10-year ...
Uncertainty on correlation parameters is another important source of model risk. Cont and Deguest propose a method for computing model risk exposures in multi-asset equity derivatives and show that options which depend on the worst or best performances in a basket (so called rainbow option) are more exposed to model uncertainty than index options.