Derivatives Securities Pricing and Modelling

In terms of notional value outstanding, derivatives markets declined in both over-the-counter and exchange-traded transactions during the 2007–2009 global financial crisis (GFC) period, as counterparty and credit concerns became pre-eminent. However, during the 2010–2011 second stage of the GFC, markets rebounded and by June 2011 outstandings reached new levels which highlight the importance these contracts continue to play in the day-to-day risk management and trading activities of corporations and financial intermediaries. The bulk of the contracts traded are interest rate-related instruments and are denominated in either US dollars or Euro. Credit-related instruments remain an important market segment, although outstandings remain at pre-crisis period levels. Of particular concern for regulators is the role of non-bank financial intermediaries, which are the main counterparty to derivatives transactions. While their share of the market remains unchanged over the last decade, outstandings overall have increased more than fourfold. The present volume considers the issues that participants face in today's derivatives markets including the potential impact of derivatives on economic stability, pricing issues, modelling as well as model performance and the application of derivatives for risk management and corporate control.