Abstract:
We propose a unified methodology to input non-linear views from any number of users in fully general non-normal markets, and perform, among others, volatility, copula, tail-risk stress-testing, scenario analysis, and relative ranking allocation in those markets. We walk the reader through the theory and we detail an efficient numerical algorithm to implement our methodology under fully general assumptions. As it turns out, no repricing is necessary and the methodology can be readily applied to books of complex derivatives. We also present an analytical solution which includes previous results as special cases and is useful for benchmarking.

Abstract:
The pricing of snowball notes in the full-factor LIBOR market model is considered. The primary aspect of the problem considered is the early exercise feature, and it is shown how to characterize a class of sub-optimal points of exercise. By combining this characterization with least-squares regression on a suitable set of basis functions and using an extra trigger enhancement, it is shown that very tight lower bounds can be obtained in cases where previous methods required the use of sub-Monte Carlo simulations.

Abstract:
Comparing realized dividends with dividend forecasts, we propose to describe dividend risk by a truncated t-distribution. We then investigate the impact of dividend uncertainty on European and American option prices. We find that the impact of dividend uncertainty on option prices is negligible for short term options. Dividend timing risk is only relevant in case of European options, if the ex-dividend date might be postponed to occur after the option's maturity. But the impact of dividend risk on long dated option prices is not negligible since analysts' forecasts scatter much more for several years of dividend forecast. We finally propose a modification of Lintner's (1956) partial adjustment model for dividends which improves prediction of dividend cuts.

Abstract:
This paper analyzes the dynamic relationship between CDS spreads and stock market implied credit spreads (ICS) for a large international set of companies during the period 2002-2004. We find the relationship between these credit spread measures to be stronger, and the probability of the stock market leading credit risk discovery to be higher, at the lower credit quality levels. However, consistent with the argument of insider trading in credit derivatives, we document a positive relationship between the frequency of severe credit downturns and the probability of the CDS market leading price discovery. Apart from these findings, our results suggest a slight informational dominance of the stock market that declines over time.

Abstract:
Mortality or longevity risk constitutes an important risk factor in both life insurance and pensions. This paper proposes a dynamic mortality model including both permanent longevity jump and temporary mortality shock processes. We introduce a trend reduction component to describe an unexpected mortality improvement over an extended period of time. Our model also captures the uneven effect of these events on different ages and the correlation among them. Finally, we show how to apply this model to price longevity securities.

Abstract:
We model an environment in which firms disclose only one side of a hedging transaction, namely the gain or loss on the forward. However, the firm cannot credibly disclose the other side of the hedging transaction, namely the underlying exposure that is being hedged. We show that because the firm cannot credibly communicate that the exposure from its underlying project is hedgeable, greater transparency in the firm's derivative activities distorts firms' hedging decisions.The nature of these distortions depend crucially on (i) firms' information quality about their project types and (ii) the market's prior beliefs about whether or not firms have hedgeable projects.

Abstract:
Since the ratification of the Kyoto Protocol by a large number of countries, carbon trading has been expanding continuously. The objective of this chapter is to study the trading of Kyoto credits. We begin with the origins of carbon trading in order to understand how carbon trading works in Europe and specifically the functioning of the European Union Emission Trading Scheme (EU ETS). This scheme has facilitated the creation of several spot, futures and options markets where it is possible to trade European Union Allowances (EUAs). The different types of contracts that permit the trading of EUAs are analysed in detail. Additionally, as one of the objectives of the third flexibility mechanism of the Kyoto Protocol (emissions trading) is the creation of a global carbon market, the possibilities of linking the EU ETS with the other United Nations carbon markets are also studied. Finally, the trading of the units generated by the Joint Implementation and the Clean Development Mechanism is also explored. The main conclusion of the chapter is that the EU ETS has succeeded in imposing a price on carbon emissions, which was one of its most important objectives.

Abstract:
In this study, we examine the relationship between the U.S. real price of oil and factors that affect its movement over time: futures prices, the value of the dollar, exploration, demand, and supply. All of these variables are treated as jointly endogenous and a reduced form vector error correction model, testing for cointegration amongst the variables, is estimated. We find that for model specifications with short-term futures contracts, supply does indeed dominate price movements in the crude oil market. However, for specifications including longer-term contracts that are inherently more speculative, the real price of oil appears to be determined predominantly by the futures price. Moreover, there is empirical evidence of hoarding in the crude oil market: both oil stocks/inventories and futures prices are found to be positively cointegrated/correlated with each other. From a policy perspective, the results of this analysis indicate that if regulators really wanted to limit speculation in the oil market, they should keep the shorter-term futures contracts and eliminate the more speculative six months futures contracts.

Abstract:
In this paper we will propose a simple approach to simulating Heston model efficiently and accurately. All existing simulation schemes so far directly work with the mean-reverting square root process of the variance in Heston model, instead we transform the variance to an equivalent volatility which follows a mean-reverting Ornstein-Uhlenbeck process. We will show it is more convenient to simulate the transformed volatility process than the original variance process since the new Ornstein-Uhlenbeck process does not have any term of square root, and is not restricted to any parameter restriction. Based on the transformed volatility process, we suggest a simple and exact scheme for the simulation of Heston model. Numerical examples show that the new scheme and Andersen's QE scheme perform very closely, and outperform other schemes such as log-normal scheme. While QE scheme suffers from the problem of "leaking correlation", transformed volatility scheme does not, and therefore, provides a high-quality alternative to the existing simulation schemes for Heston model.