In this thesis I present a framework for intelligent software agents to manage risk in electronic marketplaces using Option Derivatives. To compare the performance of agents that trade Option Derivatives with agents not using them, I create a simulation of a financial marketplace in which software agents are vested with decision rules for buying and selling assets and Options. The motivation of...

We study pricing under the local volatility. Our research is mainly intended for pedagogical purposes. In the first part of our work we study the local volatility modeling. We derive the local volatility formula in terms of the European call prices and in terms of the market implied volatilities. We propose and calibrate to the DAX option data a functional form for the implied volatility which ...

We investigate the interaction of volatility smiles and liquidity in the euro (€) interest rate option markets, using an extensive data-set on daily bid and ask prices of interest rate caps and floors. We find that, in this market, the implied volatility smiles are asymmetric, and are steeper on the ask-side. Liquidity variables have significant explanatory power for both curvature and asymmetr...

We see that the price of an european call option in a stochastic volatility framework can be decomposed in the sum of four terms, which identify the main features of the market that affect to option prices: the expected future volatility, the correlation between the volatility and the noise driving the stock prices, the market price of volatility risk and the difference of the expected future v...

We consider hedging of a path-dependent European style option with convex continuous payoff in a discrete time incomplete market, where underlying stock price jumps are distributed over a bounded interval. The incompleteness of the market produces an interval of no-arbitrage option prices for the path-dependent option. Upper and lower bounds for the noarbitrage price interval are developed. Exp...

A new general model for asset returns is studied in the framework of the Fractal Market Hypothesis (FMH). To accomodate markets with arbitrage opportunities it concerns capital market systems in which the Conditionally Exponential Dependence (CED) property can be attached to each investor on the market. Emploing the limit theorem for the CED systems, the universal characteristics for the distri...

In this paper a new credit risk model for credit derivatives is presented. The model is based upon the ‘Libor market’ modelling framework for default-free interest rates. We model effective default-free forward rates and effective forward credit spreads as lognormal diffusion processes, and recovery is modelled as a fraction of the par value of the defaulted claim. The newly introduced survival...

We examine the joint time series of option prices and returns on the S&P 500 index and a set of stocks drawn from the index with a new arbitrage-free multivariate stochastic volatility model that captures a market effect. The preliminary results show that the new model fits well for all the marginal time series for different periods of time. The price of volatility risk is estimated from option...

Free Software is sometimes considered solely a technical option, but that is a quite limited point of view: we suggest, indeed, that Free Software is not merely a technical option, but it is, in fact a different working paradigm for the software development community and a different model for acquiring (and sharing) resources in the Information Society. This paper will discuss this working para...