Theory of Conic Finance

2017 ◽  
pp. 13-21
Author(s):  
Azar Karimov
Keyword(s):  
Conic Finance

Conic Finance

2016 ◽  
pp. 77-92
Author(s):  
Dilip Madan ◽  
Wim Schoutens
Keyword(s):  
Conic Finance

CONIC CPPIs

2018 ◽  
Vol 21 (02) ◽  
pp. 1850012
Author(s):  
INE MARQUET ◽  
WIM SCHOUTENS
Keyword(s):  
Main Idea ◽  
Trading Strategies ◽  
The Other ◽  
Risky Asset ◽  
Underlying Asset ◽  
Constant Multiplier ◽  
State Dependent ◽  
Conic Finance ◽  
The One ◽  
Finance Theory

Constant proportion portfolio insurance (CPPI) is a structured product created on the basis of a trading strategy. The idea of the strategy is to have an exposure to the upside potential of a risky asset while providing a capital guarantee against downside risk with the additional feature that in case the product has since initiation performed well more risk is taken while if the product has suffered mark-to-market losses, the risk is reduced. In a standard CPPI contract, a fraction of the initial capital is guaranteed at maturity. This payment is assured by investing part of the fund in a riskless manner. The other part of the fund’s value is invested in a risky asset to offer the upside potential. We refer to the floor as the discounted guaranteed amount at maturity. The percentage allocated to the risky asset is typically defined as a constant multiplier of the fund value above the floor. The remaining part of the fund is invested in a riskless manner. In this paper, we combine conic trading in the above described CPPIs. Conic trading strategies explore particular sophisticated trading strategies founded by the conic finance theory i.e. they are valued using nonlinear conditional expectations with respect to nonadditive probabilities. The main idea of this paper is that the multiplier is taken now to be state dependent. In case the algorithm sees value in the underlying asset the multiplier is increased, whereas if the assets is situated in a state with low value or opportunities, the multiplier is reduced. In addition, the direction of the trade, i.e. going long or short the underlying asset, is also decided on the basis of the policy function derived by employing the conic finance algorithm. Since nonadditive probabilities attain conservatism by exaggerating upwards tail loss events and exaggerating downwards tail gain events, the new Conic CPPI strategies can be seen on the one hand to be more conservative and on the other hand better in exploiting trading opportunities.

scholarly journals Dynamic Conic Finance via Backward Stochastic Difference Equations

2015 ◽  
Vol 6 (1) ◽  
pp. 1068-1122 ◽  
Author(s):  
Tomasz R. Bielecki ◽  
Igor Cialenco ◽  
Tao Chen
Keyword(s):  
Difference Equations ◽  
Stochastic Difference Equations ◽  
Conic Finance

CONIC CVA AND DVA FOR OPTION PORTFOLIOS

2020 ◽  
Vol 23 (05) ◽  
pp. 2050032
Author(s):  
SJOERD VAN BAKEL ◽  
SVETLANA BOROVKOVA ◽  
MATTEO MICHIELON
Keyword(s):  
Financial Institutions ◽  
Explanatory Variable ◽  
Commodity Futures ◽  
Distortion Parameter ◽  
Credit Quality ◽  
Futures Options ◽  
Conic Finance ◽  
Distortion Functions ◽  
Pricing Measure ◽  
Bid Ask Spreads

In this paper, we propose a framework for credit and debit valuation adjustments (CVA and DVA, respectively) for options and option portfolios which is based on conic finance, that is, where the positions are valued at their bid or ask prices depending on whether they are assets or liabilities. This can be achieved by transforming the pricing measure via appropriate distortion functions, depending on (at least) one parameter. We apply our methodology, which is based on the Wang transform, to portfolios of European commodity futures options, and we show that both CVA and DVA are significantly impacted by bid-ask spreads, when compared to their traditional risk-neutral counterparts. In particular, we show that DVA decreases when computed under conic finance settings, which is in line with the regulatory efforts to rein in DVA gains for financial institutions resulting from their own credit quality deterioration. Finally, we investigate the robustness of our approach with respect to the calibrated parameters, and we show that the calibrated distortion parameter is an excellent explanatory variable for the observed bid-ask spreads.

Applied Conic Finance

2016 ◽  
Author(s):  
Dilip Madan ◽  
Wim Schoutens
Keyword(s):  
Conic Finance

CONIC FINANCE AND THE CORPORATE BALANCE SHEET

2012 ◽  
pp. 451-474
Author(s):  
DILIP B. MADAN ◽  
WIM SCHOUTENS
Keyword(s):  
Balance Sheet ◽  
Conic Finance

scholarly journals DYNAMIC CONIC FINANCE: PRICING AND HEDGING IN MARKET MODELS WITH TRANSACTION COSTS VIA DYNAMIC COHERENT ACCEPTABILITY INDICES

2013 ◽  
Vol 16 (01) ◽  
pp. 1350002 ◽  
Author(s):  
TOMASZ R. BIELECKI ◽  
IGOR CIALENCO ◽  
ISMAIL IYIGUNLER ◽  
RODRIGO RODRIGUEZ
Keyword(s):  
Transaction Costs ◽  
Risk Measures ◽  
Probability Measures ◽  
Coherent Risk ◽  
Conic Finance ◽  
Bid Prices ◽  
Path Dependent ◽  
Gain Loss ◽  
Risk Neutral Measures ◽  
Dynamic Gain

In this paper we present a theoretical framework for determining dynamic ask and bid prices of derivatives using the theory of dynamic coherent acceptability indices in discrete time. We prove a version of the First Fundamental Theorem of Asset Pricing using the dynamic coherent risk measures. We introduce the dynamic ask and bid prices of a derivative contract in markets with transaction costs. Based on these results, we derive a representation theorem for the dynamic bid and ask prices in terms of dynamically consistent sequence of sets of probability measures and risk-neutral measures. To illustrate our results, we compute the ask and bid prices of some path-dependent options using the dynamic Gain-Loss Ratio.

scholarly journals Estimation of the Bid-Ask Prices for the European Discrete Geometric Average and Arithmetic Average Asian Options

2021 ◽  
Vol 2021 ◽  
pp. 1-11
Author(s):  
Xiankang Luo ◽  
Tao Chen
Keyword(s):  
Law Of One Price ◽  
Asian Options ◽  
European Options ◽  
Quantitative Finance ◽  
Arithmetic Average ◽  
Closed Form Solutions ◽  
Geometric Average ◽  
Conic Finance ◽  
The Law ◽  
Exciting Development

Conic finance is a new and exciting development in quantitative finance, which is widely applied to several topics in finance. The theory of conic finance extends the law of one price to the law of two prices, which yields closed forms for bid-ask prices of European options. In this paper, within the framework of conic finance, we derive effective, explicit, approximate formulas to estimate the bid-ask prices for the European discrete geometric average and arithmetic average Asian options. Finally, we give two examples to demonstrate and validate that the approximate closed-form solutions are efficient and accurate.

Applications of Conic Finance

2016 ◽  
pp. 119-125
Author(s):  
Dilip Madan ◽  
Wim Schoutens
Keyword(s):  
Conic Finance
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