Are Interest Rate Changes Normal or Lognormal?

The most basic assumption behind all option models is what type of stochastic process is followed by the underlying asset. For interest rates, the two leading candidates are normal and lognormal, and with the advent of negative rates it's more important than ever to know which of these is better explained by actual historical data.

Persistence of Equity Volatility Rankings

Empirical research into the behavior of volatility over time, with implications for option pricing models, hedging, risk management, and more. It also leads to a vastly simplified methodology for calculating VaR which requires estimation of just a fraction of the number of variables now used.

How To Calculate Historical VaR

The follow up to "Var Doesn't Have To Be Hard" this paper and spreadsheet show exactly how the calculations are done

There's one measure of market risk that beats all the others. And the winner is...

Battle of the Pricing Models: Trees vs. Monte Carlo

This white paper compares two major algorithms for pricing derivatives: trees and Monte Carlo simulation. While they are often seen as mutually exclusive, this paper shows that they are really largely the same thing, except one does its job better than the other. Which one wins? Get the paper to find out.

A Framework for Understanding Options: Defining Their Payoffs and Risks

An non-technical introduction to options and derivatives, which first discusses what they are, and then uses the concept of payoff diagrams to analyze risks and rewards.

Presents the mathematics of how to price plain vanilla calls, using very simple formulas which leads to an intuitive understanding of how options are priced. The binomial model is derived in detail.

Extends the binomial model of the Basic Option Pricing paper to show how easy it is to enhance the model to handle all sorts of extra features, such as puts, American options, options on futures, options on forwards, dividends, portfolios of options, changing strike prices, and more.

The Top Ten Reasons I Don't Need Derivatives Software

An entertaining list of reasons people don't buy our products.

How To Price Derivatives Using Monte Carlo Simulation

Includes an Excel spreadsheet that shows the whole thing, step by step.

How To Price Derivatives Using Multi-Factor Monte Carlo Simulation

Extends simple Monte Carlo to two or more factors.

What I Learned From The Stock Mrket Crash

In theory, theory works. In practice, not always.

Our frustration at the obfuscation of regulation.

How To Price Derivatives In Your Head

You don't need a PhD to do this.

An unintuitive result from option pricing theory.

How to choose the right software to manage a derivatives book.

An interesting anomoly in cetain derivatives markets leads to a surprising trading strategy.

Add-Ins That Do More Than Add Value

How to use spreadsheet addins to manage derivatives portfolios.

Clarity in Understanding Electricity Contracts and Their Associated Risks

An introduction to the unique aspects of electricity trading.

The Coming Electricity Meltdown

A prescient note that was eerily accurate at predicting the power trading crisis.

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