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Alberto Elices

Publications and source records attributed to Alberto Elices.

6 recordsLinked to original sources
arXiv2020

X-Value adjustments: accounting versus economic management perspectives

This paper provides a mathematical framework based on the principle of invariance to classify institutions in two paradigms according to the way in which credit, debit and funding adjustments are calculated: accounting and management perspectives. This conceptual classification helps to answer questions such as: In which paradigm each institution sits (point of situation)? Where is the market consensus and regulation pointing to (target point)? What are the implications, pros and cons of switching perspective to align with future consensus (design of a transition)? An improved solution of the principle of invariance equations is presented to calculate these metrics avoiding approximations and irrespective of the discounting curve used in Front Office systems. The perspective is changed by appropriate selection of inputs always using the same calculation engine. A description of balance sheet financing is presented along with the justification of the funding curves used for both perspectives.

q-fin.PR↗
arXiv2017

A heuristic pricing and hedging framework for multi-currency fixed income desks

It is well known that traded foreign exchange forwards and cross currency swaps (CCS) cannot be priced applying overnight cash and carry arguments as they imply absence of funding advantage of one currency to the other. This paper proposes a heuristic present value concept for multi-currency pricing and hedging which allows taking into account the funding and therefore the collateral currency and its pricing impact. For uncollateralized operations, it provides more funding optionality to achieve either cheaper or more connected funding to the hedging instruments. When foreign exchange forwards get aligned with overnight cash and carry arguments, this method naturally converges to the well established OIS discounting where each leg is funded in its own currency. A worked example compares this approach with a benchmark.

q-fin.PR↗
arXiv2012

Applying hedging strategies to estimate model risk and provision calculation

This paper introduces a relative model risk measure of a product priced with a given model, with respect to another reference model for which the market is assumed to be driven. This measure allows comparing products valued with different models (pricing hypothesis) under a homogeneous framework which allows concluding which model is the closest to the reference. The relative model risk measure is defined as the expected shortfall of the hedging strategy at a given time horizon for a chosen significance level. The reference model has been chosen to be Heston calibrated to market for a given time horizon (this reference model should be chosen to be a market proxy). The method is applied to estimate and compare this relative model risk measure under volga-vanna and Black-Scholes models for double-no-touch options and a portfolio of forward fader options.

q-fin.RM↗
arXiv2012

Perturbed Copula: Introducing the skew effect in the co-dependence

Gaussian copulas are widely used in the industry to correlate two random variables when there is no prior knowledge about the co-dependence between them. The perturbed Gaussian copula approach allows introducing the skew information of both random variables into the co-dependence structure. The analytical expression of this copula is derived through an asymptotic expansion under the assumption of a common fast mean reverting stochastic volatility factor. This paper applies this new perturbed copula to the valuation of derivative products; in particular FX quanto options to a third currency. A calibration procedure to fit the skew of both underlying securities is presented. The action of the perturbed copula is interpreted compared to the Gaussian copula. A real worked example is carried out comparing both copulas and a local volatility model with constant correlation for varying maturities, correlations and skew configurations.

q-fin.PR↗
arXiv2011

Weighted Monte Carlo: Calibrating the Smile and Preserving Martingale Condition

Weighted Monte Carlo prices exotic options calibrating the probabilities of previously generated paths by a regular Monte Carlo to fit a set of option premiums. When only vanilla call and put options and forward prices are considered, the Martingale condition might not be preserved. This paper shows that this is indeed the case and overcomes the problem by adding additional synthetic options. A robust, fast and easy-to-implement calibration algorithm is presented. The results are illustrated with a geometric cliquet option which shows how the price impact can be significant.

q-fin.CP↗