Abstract We consider the problem of finding the single-period fixed-income performance contributions of a generic security with a complex cash-flow structure. We extend the traditional fixed-income contribution model, based on the duration and the convexity, to include securities with generic floating-rate coupons and possibly with embedded call, put, or convertibility options. Using this method we […]
A risk decomposition framework consistent with performance measurements
Abstract We define a framework to compute the risk contributions of a portfolio consistently with a given performance-measurement schema. The framework has a wide array of applications, such as risk attribution, and matches the standard risk decomposition when the portfolio has a linear dependence on the factor exposures. We go beyond the traditional risk-decomposition approach, […]
Projection performance contributions of non-linear portfolios
Abstract We define a theoretical framework to exactly measure the additive risk-driver contributions to the performance of an investment portfolio. The approach is based on first principles, is non local and is especially suitable for non-linear portfolios. We consider a single-period return and assume that the generated cash flows are reinvested in the portfolio itself. […]
Non perturbative key-rate contributions to bond returns
Abstract We show a non-perturbative method to split the bond return into components coming from the different key-rates, the credit spread, the carry term, and another couple of minor components. We explicitly show the results for the case of a fixed-rate coupon bond with a price computed using cash-flow discounting with a yearly-compounded yield curve. […]
The emergence of a new discipline: Quantitative Hospitality and Foodservice
In order to explain what is quantitative hospitality and foodservice, let me start with three anecdotes. I remember the feeling of entering the bar right across the street from where I lived for many years in Italy: they would greet me with my nickname and ask me if I’d like to have my usual breakfast. […]
Seasonality of dividend point indexes
Abstract We analyse a variety of dividend-point indexes, typically used to determine the payoff of dividend derivatives. We show strong evidence of seasonality patterns for all indexes examined. Since dividend-point reset with irregular time intervals, we find the need to use a different seasonality function for the current or any future period. We determine the […]
Test-Driven Development and its importance of for hot startups
What is test-driven development? Test-driven development is a powerful coding philosophy that allows you to write code efficiently and makes its maintenance much easier. The basic idea of test-driven development is that you don’t even start to write your code unless a test is broken. Writing the tests before the code seems very boring, however […]
Risk measure, XVA Analysis, Cost of Capital and Central Counterparties Workshop
In this workshop a number of topics were discussed. In primis several valuation adjustments (denoted by the generic name XVA) such as CVA, FVA, and KVA. The level of all the seminars was very high and you needed some previous knowledge of the subject in order to fully appreciate them. I want to highlight three […]
Finite difference methods for sensitivity computations
Abstract We describe some basic finite-difference methods to estimate the derivatives of a generic smooth function. For a function of one variable we provide the derivation of the standard forward difference, backward difference, and central difference approximation of the first and second derivatives. We also derive the expression for the second-order cross partial derivative for […]
Introduction to linear commodity derivatives
Abstract We provide an introduction to linear derivatives on common storable commodities. Using no-arbitrage arguments we derive an expression for the quote of commodity future contracts and we highlight the importance of convenience yield. We show a some numerical results for the convenience-yield term structure of few common commodities and focus on the similarities with […]