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Newsletter | 30 Mar 2015 | Issue 303


Uwe Wystup

In the 15th MathFinance Conference last week we had yet another two exciting days with a broad mix of topics. More than 130 delegates were registered from all over Europe. So what did I learn?

Jessica James (Commerzbank) shared an update of her research on FX options performance. While she had presented a talk with a similar title on the MathFinance conference last year, it turned out that the story has now become even clearer:

  • Carry is critical to option value; thus calls tend to lose money and puts tend to make money
  • The effect is larger for longer tenors and EM pairs. It is reversed for anomalous carry pairs
  • Short dated options are somewhat expensive on average
  • OTM options are worse value than ATM options

So after all, the best deals are the ones where one bets against the forward curve, which rests on the idea that the best prediction of the future spot price is the current spot price. This supports my experience in structuring FX solutions that deal that normally work and produce attractive conditions would be the ones where buyers bet against the FX forward. Jessica’s new book will appear in a few weeks for all who wish to read the details. Most remarkable, Commerzbank has made a large set of historic data available to conduct this analysis.

Another way to invest was presented by Peter Forsyth (University of Waterloo, Canada): Long-term investment asset allocation can be optimized and used by a trading algorithm, provided the investor commits to a target wealth at the end of the investment horizon and sticks to it. The strategy reduces shortfall probability by three and standard deviation 250 %. Substantial improvements still apply in a jump-diffusion model taking into account crashes in the market and slippage in the rebalancing process. The title “Better than pre-commitment mean-variance portfolio allocation strategies: a semi-self-financing Hamilton-Jacobi-Bellman equation approach” didn’t appear to be very hands-on, but turns out to be of practical interest of individual investors as well as pension funds.

On the technology side, Marzio Sala (UBS) presented his insights into differentiation on the portfolio level to calculate Greeks. He concludes that the best way to reach this goal is to use adjoint-PDEs. Some of his conclusions were

  • Continuous adjoint less cumbersome and more efficient than discrete adjoint
  • Memory requirements negligible for 2D models
  • (Relatively) easy to extend a financial library to support it
  • Speed-ups obtained are significant
  • Numbers very well aligned, differences generally of just a few %
  • Second-order derivatives possible

The paper has been submitted for publication, and we are all eager to see it.

On the model side, Artur Sepp (Bank of America Merril Lynch) illustrated the relationship between empirical volatility skew-beta and delta-hedging P&L and their applications for trading strategies. In fact, accounting for empirical skew-beta can considerably improve realized P&L of delta-hedging strategies. He further presents empirical evidence for log-normality of implied and realized volatilities. He applies this for maximum likelihood estimation of dynamics of realized and implied volatilities and generates trade signals. He introduces the beta stochastic volatility model with risk-premiums and then makes the model consistent with both implied skew and empirical skew-beta.

Rolf Poulsen’s (Copenhagen University) presentation of the EUR-CHF shadow exchange rate, which was a very close prediction of the post 15-Jan EUR-CHF drop, triggered many more questions on our EUR-CHF panel discussion. Ulrich Leuchtmann (Commerzbank) explained the drop was foreseeable, although the exact timing not predictable. We concluded, however, that EUR-DKK is a completely different story. For EUR-CHF there is a lot of need to reorganize positions in CHF loans in Germany, Poland and Hungary.

The panel on Tuesday on recent advances in model risk underlined the consistent need of financial markets models. Helmut Glemser (Lloyds) pointed out that working on validation and risk management has been gaining more recognition over the last couple of years.

The parallel session on Tuesday was the STRIKE mini symposium on advanced numerical techniques in finance. STRIKE is a Marie Curie International Training Network, where MathFinance is an associated industry partner. We were happy to include this session in the conference.

There is a lot more to take away, more than I can report about in a short overview. Papers are ready to download from the conference page for all registered conference attendees.

I would like to thank all speakers for contributing and sharing their ideas with us, all the sponsors for their continuing support, all the delegates for their lively contributions and questions, and our team at MathFinance for the production. We hope that the community of conference participants grows further and I hope to see you again next year.

Uwe Wystup
Managing Director of MathFinance


PhD positions available in WAKEUPCALL EU project

Applications are invited for six Early Stage Researchers (ESRs, like PhDs) who will work closely with industrial partners on a PhD Thesis in financial mathematics. All positions concern modern topics in financial risk management.

There are two positions in Italy, two in Spain and two in the Netherlands, see link.

Applications can be sent before 15 April 2015 following these instructions.

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Training Courses

On Demand

Foreign Exchange Exotic Options, 3-day format

Presented by Dr. Uwe Wystup.


FX exotics are becoming increasingly commonplace in today's capital markets. The objective of this workshop is to develop a solid understanding of the current exotic currency derivatives used in international treasury management. This will give participants the mathematical and practical background necessary to deal with all the products on the market.

This advanced practical three-day course covers the pricing, hedging and application of FX exotics for use in trading, risk management, financial engineering and structured products. Uwe has been teaching it successfully for many years on several continents. It is not a basic course on options. Understanding the FX vanilla options market and FX smile however, is essential to understand exotics. This course is also not a pure quantitative modelling seminar. It provides the necessary mathematics you need to understand to be successful in FX Options. More specific quantitative aspects are covered in a two-day extended course. For a two-day format click here.

All delegates of the course offered by London Financial Studies will receive a copy of Uwe’s book "FX Options and Structured Products".

Advanced Quantitative Foreign Exchange Options

Presented by Dr. Uwe Wystup.


This course, by Professor Uwe Wystup, extends his highly successful seminar on "Foreign Exchange Exotic Options". It is meant for a technical/quantitative audience with good programming skills familiar with the preceding seminar. Uwe provides an overview of the models used in the FX Options market, discusses their pros and cons and numerical details in the implementation.

Delegates are expected to be familiar with the financial products, stochastic calculus, linear algebra, complex numbers and advanced calculus.

MathFinance Presentation: Post-Crisis View on the Yield Curve Modeling Problem

Presented by Alexander Stromilo.


The 2007-2008 Credit crunch showed us many inconsistencies and "wrong ideas" used in financial models: VaR is too risky, while Libor is not risk-free anymore. Post-crisis regulations like ISDA Master Agreement including the Credit Support Annex (mandatory collateralization in OTC) posted new rules that must be taken into account. "New models" used by large market players make it impossible for others to still use the "old ones". The financial world has changed, and we have to adjust our point of view accordingly.

This seminar addresses several questions arising from the Interest Rate Market.

FX Accumulators and Target Forwards

Presented by Prof Uwe Wystup.


This is part of a series of webinars of FX Options in treasury. Some of the questions we shall answer include:

  • How does an FX target forward work?
  • Extensions/modifications: leverage, pivot target forward?
  • Pricing/hedging
  • Current vendors/systems

Upcoming Events

Advanced Risk and Portfolio Management (ARPM) Bootcamp - by Attilio Meucci

Dates: July 13-18, 2015

Location: New York University
40 CE units CFA Institute, 40 CPE units GARP

The ARPM Bootcamp provides in-depth understanding of buy-side modeling from the foundations to the latest advanced statistical and optimization techniques, in nine intense, heavily quantitative hours each day, with theory, live simulations, review sessions and exercises.
Topics include portfolio construction, factor modeling, copulas, liquidity, risk modeling, and much more.
Also features Gala Dinner with world-renowned speakers such as Rob Almgren, Peter Carr, Bruno Dupire, Jim Gatheral, Bob Litterman, Bob Litzenberger, Fabio Mercurio, Steven Shreve.

See a short video!
Go here to register with the discounted supporter rate or contact us at arpm.bootcamp@symmys.com.

2015 Quantitative Methods in Finance Conference (QMF)

The conference will take place between the 15th and 18th December 2015 at the Hilton Hotel. The event will bring together leading experts in Quantitative Finance Industry and Academia in Sydney Australia.

Pensions, Insurance, Regulation, Model Risk, CVA, Risk Measurement, Commodities, Emissions Trading and other areas of Quantitative Finance

Hansjoerg Albrecher, Alexandre Antonov, Francesca Biagini, Rama Cont, Mark Davis, Freddy Delbaen, Ernst Eberlein, Robert Elliott, Paul Embrechts, Hélyette Geman, Martino Grasselli, Paolo Guasoni, Xin Guo, Constantinos Kardaras, Steve Kou, Dilip Madan, Marek Musiela, Shige Peng, Johannes Ruf, Klaus Sandmann, Michael Schmutz, Stefan Tappe, Dirk Tasche, Xun Yu Zhou

The abstract submission is open until 1st May 2015!

View detailed info | Register 

Please note that Early Bird end on 15 September 2015!

LondonFS Courses 2015

Course Name
Course Outline

Volatility: Trading and Managing Risk

London: 13th - 15th April 2015

The course starts by analysing the role of volatility in the current financial markets including the causes and impact of volatility smiles on a variety of financial products. This leads into sessions on the application of a range of volatility derivatives such as volatility futures and options, tradeable volatility products such as VXX, and volatility swaps. The final part of the programme covers the treatment of volatility in the more popular stochastic volatility models used in the industry such as SABR and Heston and provides insights into the most relevant approaches to modelling volatility under current market conditions.

Presented By: Simon Acomb

Bank Stress-Testing, Analysis and Valuation

London: 16th - 17th April 2015

This 2-day course covers bank stress-testing, analysis and valuation. The programme begins with foundation work covering the basic bank business model, bank accounting and bank regulation under Basel 3. Exercises emphasise the role of stress- testing banks’ capital and liquidity in dividing banks into those that are more susceptible to bank failure and those that are likely to survive. The appropriate selection of gone-concern and going- concern valuation methods is then deployed to value banks’ equity and credit securities.

Presented By: Rupesh Tailor

The Impact of Economic Data on Financial Markets

London: 20th - 21st April 2015

Understanding the role of economic indicators which determine market performance is an essential skill in the context of an increasingly sophisticated and complex financial marketplace. This course identifies the information that really matters and provides an insight into how best to interpret the increasing wealth of data now available.

Presented By: Jeremy Hawkins

Managing FX Risk Using Derivatives

New York: 20th - 22nd April 2015

This program will give you the confidence to use, price, market, evaluate and manage risk with FX Vanilla options, including best practice and conventions from buy side and sell side.
Delegates will gain a solid understanding of the markets and an insight into standard models used for pricing these products and managing Foreign Exchange risk.

Presented By: Dr. Zareer Dadachanji

The xVA Concept - Counterparty Risk, Collateral, Funding and Capital

New York: 27th - 28th April 2015

This course explains and describes the valuation adjustments in derivatives pricing in relation to counterparty risk, collateral, funding and capital components. The ideas are built up sequentially and workshops are used to develop the key ideas including simulation of exposure, the impact of risk mitigants and calculation of CVA, DVA, FVA, CollVA, KCVA and MVA.

Presented By: Dr Jon Gregory

Advanced Liquidity Risk: Contingency Planning, FTP and Stress Testing

New York: 27th - 29th April 2015

An in-depth, 3-day examination of practical requirements for liquidity risk management, including a detailed step-by-step approach to stress-testing and extensive coverage of liquidity funds transfer pricing (LFTP). The programme also covers best practice and a framework for contingency funding plan with practical examples. Delegates will be able to use this information to benchmark and improve their bank's CFPs.

Presented By: Leonard Matz

Interest Rate Derivatives 1: Hedging and Managing Risk

Singapore: 14th - 17th April 2015

A comprehensive workshop on pricing and managing interest rate derivatives. This course is charged and can be booked by the day. Select the days that meet your needs, or participate in the whole course for a thorough grounding in these instruments.

Presented By: Cheryl Brown

Convertible Bonds, Hybrids and CoCos: Issuing, Pricing and Investing

Singapore: 27th - 29th April 2015

This course explains in detail a range of convertible securities, their applications and trading strategies (with special attention to hybrids and Contingent Convertibles - CoCos).

Presented By: Dr Jan De Spiegeleer

London Financial Studies is registered with CFA Institute as an Approved Provider of continuing education programs.
London Financial Studies is registered with GARP as an Approved Provider of continuing professional education (CPE) credits.

Methods of Mathematical Finance in honor of Steve Shreve's 65th birthday

Registration is open for the conference Methods of Mathematical Finance which will honor Steve Shreve's 65th birthday. The conference will be held at Carnegie Mellon University between June 1st and June 5th of 2015.

There is no registration fee, however, due to limited space it is required that you register if you wish to attend the conference. In order to register, please visit the event page and click on the 'Registration' link. The above website also contains relevant travel and lodging information.

The organizers: Dmitry Kramkov, Kasper Larsen, Scott Robertson, and Mete Soner!

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