Chapter 15 Model Risk and Liquidity Risk 风险管理与金融机构PPT（英文）.pptVIP

Model Risk and Liquidity Risk Chapter 15 Model Risk Can Lead To? Incorrect price at time product is bought or sold Incorrect hedging Finance vs Physics (page 344) The models of physics describe physical processes and are highly accurate. Their parameters do not change through time. The models of finance describe human behavior. They are at best approximations. Parameters do change through time Calibration Models of finance are calibrated to market prices daily As a result parameters change from day to day For a particular option maturing in three months volatility might be 20% on Day 1, 22% on Day 2, and 19% on Day 3. Linear Products Very little uncertainty about the right model But mistakes do happen. For example?Kidder Peabody (Business Snapshot 15.1, page 345) LIBOR-in Arrears Swaps (Business Snapshot 15.2, page 346) Actively Traded Products (page 346) We do not need a model to know the price of an actively traded product. The market tells us the price. The model is a communication tool (e.g., implied volatilities are quoted for options) It is also an interpolation tool (e.g., a tool for interpolating between strike prices and maturities. Volatility Smiles A volatility smile shows the variation of the implied volatility with the strike price The volatility smile should be the same whether calculated from call options or put options The Volatility Smile for Foreign Currency Options (Figure 15.1, page 347) Implied Volatility Strike Price The Volatility Smile for Equity Options (Figure 15.2, page 348) Implied Volatility Strike Price Volatility Term Structure In addition to calculating a volatility smile, traders also calculate a volatility term structure This shows the variation of implied volatility with the time to maturity of the option Example of a Volatility Surface(Table 15.1, page 350) Hedging Actively Traded Products Models are used in a more significant way for hedging than for pricing We can distinguish 搘ithin model?h