Category Archives: Uncategorized

Valuing an American Option Using Binomial Tree-Derivative Pricing in Excel

In a previous post, we provided an example of pricing American options using an analytical approximation. Such a pricing model is fast and accurate enough for risk management purposes. However, sometimes more accurate results are required. For this purpose, the … Continue reading

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Credit Risk Management Using Merton Model

R. Merton published a seminal paper [1] that laid the foundation for the development of structural credit risk models. In this post, we’re going to provide an example of how it can be used for managing credit risks. Within the … Continue reading

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Valuing an American Option-Derivative Pricing in Excel

In the previous installment, we presented a concrete example of pricing a European option. In this follow-up post we are going to provide an example of valuing American options. The key difference between American and European options relates to when … Continue reading

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VALUING A EUROPEAN OPTION

An option is a financial contract that gives you a right, but not an obligation to buy or sell an underlying at a future time and at a pre-determined price.  Specifically, …  an option is a contract which gives the … Continue reading

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A Simple Hedging System with Time Exit

This post is a follow-up to the previous one on a simple system for hedging long exposure during a market downturn. It was inspired by H. Krishnan’s book The Second Leg Down, in which he referred to an interesting research … Continue reading

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Historical Default Rates Do Not Predict Future Defaults

Yesterday, Bloomberg published an article arguing that the current credit risk is low because the default rate is low, Insulated by cheap money from the QE era and bolstered by cash on their balance sheets, it remains rare for companies … Continue reading

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Are Collateralized Loan Obligations the New Debt Bombs?

Last year, in a post entitled Credit Derivatives-Is This Time Different we wrote about credit derivatives and their potential impact on the markets. Since then, they have started attracting more and more attention. For example, Bloomberg recently reported that collateralized … Continue reading

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