Showing papers by "Danske Bank published in 2012"

Advanced Analytics for the SABR Model

Abstract: In this paper, we present advanced analytical formulas for SABR model option pricing. The first technical result consists of a new exact formula for the zero correlation case. This closed form is a simple 2D integration of elementary functions, particularly attractive for numerical implementation. The second result is an effective approximation of the general correlation case. We use a map to the zero correlation case having a nice behavior on strike edges. The map formulas are easily implemented and do not contain any numerical integration.These formulas are important in volatility surface construction and CMS products replication because they provide correct behavior for far strikes and reduced approximation error. The latter is also helpful for dynamic SABR models.

Analyzing interest rate risk: Stochastic volatility in the term structure of government bond yields☆

Abstract: We propose a Nelson–Siegel type interest rate term structure model where the underlying yield factors follow autoregressive processes with stochastic volatility. The factor volatilities parsimoniously capture risk inherent to the term structure and are associated with the time-varying uncertainty of the yield curve’s level, slope and curvature. Estimating the model based on US government bond yields applying Markov chain Monte Carlo techniques we find that the factor volatilities follow highly persistent processes. We show that yield factors and factor volatilities are closely related to macroeconomic state variables as well as the conditional variances thereof.

Exposure & CVA for Large Portfolios of Vanilla Swaps: The Thin-Out Optimization

Abstract: In this article we present an efficient optimization for calculating the exposure and CVA for large portfolios of vanilla swaps. It is based on a "thin-out" procedure applied to fixed payment streams, which reduces a very frequent stream of payments to a much less frequent one. The procedure requires careful handling of the path-dependence that arises from the floating legs of the swaps. We compute the exposure and CVA for a large portfolio of fixed-for-floating swaps, and find that our approximation reduces the computation time for the portfolio to that of a single swap, with a roughly annual schedule. Moreover, the approximation maintains a particularly high accuracy. Our technique is entirely model independent and can be applied to various instruments such as FX-forwards, cross-currency swaps etc.

Trust in agile teams in distributed software development

Abstract: Distributed software development (DSD) is becoming everyday practice in the software market. Difficult challenges and difficulty reaching the expected benefits are well documented. Recently agile software development has become common in DSD, despite important incompatibilities between the challenges of DSD and the key tenets of agility. Organizations thus face new challenges needing to balance the approaches to achieve beneficial distributed agile practices. Trust is a key in this, since trust is crucial for the necessary corporate behavior that leads to team success. This article reports from a study of two agile DSD teams with very different organization and collaboration patterns. It addresses trust and distrust in DSD by analyzing how the team members’ trust developed and erode through the lifetime of the two collaborations and how management actions influenced this. We found that some agile practice can empower teams to take over responsibility for managing and sustaining their own trust building and that the resulting close personal trustbased ties within the agile team carry the capacity to ease the challenges of DSD stemming from distance. We also found that management neglect of trust-building in other situations can hinder the development of beneficial balanced agile DSD practices.

The Recent Securities Law Litigation in the US Supreme Court

Abstract: The purpose of this case-law study is to introduce the reader to some of the most significant recent developments in US Supreme Court litigation related to securities law in the context of the recent credit crisis. Using critical legal analysis, with the help of scholarly writings, the following US Supreme Court cases are examined one-by-one in turn: Morrison et al. v. National Australia Bank LTD et al. (Morrison); Merck & Co., Inc., et. al. v. Reynolds et. al. (Merck); SEC v. Edwards.A deep and thorough analysis of the cases allows one to draw a general conclusion as to the ideas usually present in the securities' law cases brought before the US Supreme Court. The ever present and evident concept uniting the three cases is that of information asymmetry as identified and analyzed by George Akerlof. The article concludes with the general discussion of information asymmetry being an ever present issue in securities litigation in front of the US Supreme Court.