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Seminar: Autumn 2006

Stanford Financial Mathematics Seminar Schedule

Date Speaker Affiliation Talk Title
(click to see Abstract)


Jan Vecer Columbia University, Statistics Department Maximum Drawdown, Directional Trading and Market Crashes  
10/6 Paul Thurston

Countrywide Financial Corporation

Long-Range Dependence in Mortgage Terminations paper
10/13 Mike Rierson Fixed Income PM/Research Officer, Rates
Research, BGI
Forecasting Cross-Currency Swap Risk
10/20 Alex Bezjian KBC Applications in the Workplace  


Emanuel Derman Columbia University Modeling The Volatility Smile
slides pdf
Ilan Kremer Stanford, GSB Game Theoretic Approach for Option Pricing
slides pdf
11/10 Roger Lee Chicago
Hedging Variance Options on Continuous Semimartingales  
11/17 Jacky Lee Credit Suisse Volatility and Correlation Exposure in the Credit Markets
11/24 no seminar this week      
12/1 Mike Lipkin Katama Trading, LLC, American Stock Exchange, NY Sherlock Trader: Takeover Sleuth

Game Theoretic Approach for Option Pricing

Ilan Kremer (Stanford, GSB)

We study the link between the game theoretic notion of approachability or “regret minimization” and robust option pricing. We demonstrate how trading strategies that are based on approachability and minimize regret over finite horizon also imply robust upper bounds for the prices of European call options. These bounds are based on no arbitrage and are robust in that they require only minimal assumptions regarding the stock price process. We then focus on the optimal bounds and solve for the optimal volatility-based bounds in closed-form, which in turn implies the optimal regret-minimizing trading strategy. The bounds we obtain seem to be empirically relevant as they resemble option price patterns observed in practice.

Joint work with Peter M. DeMarzo and Yishay Mansour†
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Hedging Variance Options on Continuous Semimartingales

Roger Lee (Chicago)

Variance swaps, which pay the realized variance of [the returns on] an underlying price process, have become a leading tool for managing exposure to volatility risk. Variance options -- calls and puts on realized variance -- allow portfolio managers greater control over volatility risk exposure, but present greater hedging difficulties
to the dealer.

Assuming only that the underlier is a positive continuous semimartingale, we model-independently superreplicate and subreplicate variance options and forward-starting variance options, by dynamically trading the underlier, and statically holding European options.

In contrast to my August talk (on lower bounds), this one focuses on upper bounds.

Joint with Peter Carr.

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Volatility and Correlation Exposure in the Credit Markets

Jacky Lee (Credit Suisse)

We discuss credit volatility supply and demand in the single name and credit index markets. We study the interplay of volatility and correlation and effective tranche hedging. We conclude with the examination of spread dispersion effects in several hedging methods and a discussion of the non-uniqueness of tranche deltas.

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Sherlock Trader: Takeover Sleuth

Mike Lipkin (Katama Trading, LLC, American Stock Exchange, NY)

Rumors and leaks of takeovers have a profound impact on the options markets and give the astute observer a critical clue to their potential occurrence.
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