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It is well‐known that time‐homogeneous affine term structure models are incompatible with most observed initial forward rate curves. For the Vasiček (1977) and Cox et al. (1985) models, time‐inhomogeneous extensions capable of fitting any given initial forward rate curve were introduced in Hull...
Utility based indifference pricing and hedging are now considered to be an economically natural method for valuing contingent claims in incomplete markets. However, acceptance of these concepts by the wide financial community has been hampered by the computational and conceptual difficulty of...
The paper studies arbitrage opportunities and possible speculative opportunities for diffusion mean‐reverting market models. It is shown that the Novikov condition is satisfied for any time interval and for any set of parameters. It is non‐trivial because the appreciation rate has Gaussian...
Although quasi‐analytic formulas can be derived for European‐style financial claims in Heston's stochastic volatility model, the inverse Fourier integration involved makes the calculation somewhat complicated. This challenge has puzzled practitioners for many years because most implementations...
Following the increasing awareness of the risk from volatility fluctuations, the market for hedging contracts written on realized volatility has surged. Companies looking for means to secure against unexpected accumulation of market activity can find over‐the‐counter products written on...
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