student profile: Mr Edward Kim


Thesis work

Thesis title: A generalised pricing theory in non-linear markets

Supervisors: Ben GOLDYS , Marek RUTKOWSKI

Thesis abstract:

The classical Black-Scholes arbitrage pricing theory relies on simplifying assumptions that make price systems for financial contracts relatively straightforward (i.e. linear).

However, after the sub-prime crisis of 2007-2009, there has been a major shift in the operating paradigm of financial markets, with a greater emphasis on managing counterparty risk. In particular, previously held stable relationships between interest rates have diverged, posting collateral (margining) has become a widespread practice and regulators have enforced capital requirements on the balance sheets of financial institutions.

In this new context, it is no longer appropriate to apply the well-established classical Black-Scholes theory. In the first place, it is now generally recognised that the framework of discounting future cash flows using the single risk-free rate is no longer a viable pricing rule. In fact, in an expanded model with multiple yield curves, collateral, counterparty credit risk, and other market imperfections classical arbitrage pricing frameworks are not enough.

As such, we aim to develop a more general (non-linear) pricing theory which consistently accounts for the factors characterising the evolving nature of financial markets.

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