Derivative Securities Research Articles

Artificial Intelligence Security in Multiple-Unmanned System Cooperation

Multiple unmanned system cooperation is an important component of China’s new-generation artificial intelligence (AI) planning and it is a transformative technology for future national defense construction and social development of China. Although significant achievements have been made regarding the technological research and system integration of multiple unmanned system cooperation, research on AI security is still in its infancy. Promoting multiple unmanned system cooperation enables AI application and risk control. In this article, we propose a four-in-one strategy to promote the collaborative and secure development of multiple unmanned systems, investigate potential challenges and countermeasures for multiple unmanned system cooperation at the endogenous and derivative security levels, and propose several suggestions regarding the security of intelligent unmanned systems. Specifically, a national unmanned system verification platform should be established to promote the construction of talent teams; services need to be upgraded for the unmanned system industry to develop a new-generation AI security ecology; and the advantages of multiple unmanned system cooperation should be maximized to improve people’s livelihood.

К ВОПРОСУ О РЕГУЛИРОВАНИИ ИНВЕСТИЦИОННОГО БАНКИНГА В РОССИИ

Analytical documents of the Bank of Russia and financial statements of large Russian banks indicate the growth in incomes from operations with securities within the gross share of revenues of commercial banks. In the world, there are cases of excessive activity of commercial banks in the security market (the Great Depression of 1929–1933 in the USA, default on state treasury bills in Russia on the 17th August 1998), which led to negative consequences for bank clients. The author analyzed peculiarities of investment transactions conducted by commercial banks in Russia. The author gives recommendations to reduce financial risks for the commercial banks’ customers and promote the attractiveness of the investment banking products. The author’s concept of regulation of banking activity in Russia consists of two directions: regulation of classical banking (income from lending operations exceeds income from operations in the securities market) and regulation of investment banking (the predominance of investment operations). The author justifies the necessity of the introduction of mandatory insurance of funds invested in equity securities of Russian issuers admitted to circulation on the Moscow Stock Exchange in the event of bankruptcy of issuers. The paper critically evaluates the recommendation of the Bank of Russia that professional participants in the securities market should not offer complex investment products to unqualified investors as this restricts the application of derivative securities for hedging financial risks. The author suggests the requirements for the equity capital of professional participants of the securities market and the methodology for calculating the equity capital separately for classical and investment banks.

Efficient Markets and Contingent Claims Valuation: An Information Theoretic Approach.

This research article shows how the pricing of derivative securities can be seen from the context of stochastic optimal control theory and information theory. The financial market is seen as an information processing system, which optimizes an information functional. An optimization problem is constructed, for which the linearized Hamilton–Jacobi–Bellman equation is the Black–Scholes pricing equation for financial derivatives. The model suggests that one can define a reasonable Hamiltonian for the financial market, which results in an optimal transport equation for the market drift. It is shown that in such a framework, which supports Black–Scholes pricing, the market drift obeys a backwards Burgers equation and that the market reaches a thermodynamical equilibrium, which minimizes the free energy and maximizes entropy.

Application of power series approximation techniques to valuation of European style options

Fourier transforms provide versatile techniques for pricing financial derivative securities. In applying such techniques, a typical derivative valuation expression is often written as an inner product of the Fourier transform of payoff and the characteristic function of the underlying asset dynamics. Some modelling specifications imply that it might be challenging to find a closed-form expression for the characteristic function. In such situations, numerical approximations have to be employed. This paper utilises the power series approximation technique in finding explicit expressions of the characteristic function for the underlying stochastic variables. We analyse the convergence and accuracy of this technique in the context of valuing European style options written on underlying securities whose dynamics evolve under the influence of multiple Heston-type stochastic volatilities [Heston, S., A closed-form solution for options with Stochastic volatility with applications to Bond and currency options. Rev. Financ. Stud., 1993, 6, 327–343] and Cox–Ingersoll–Ross stochastic interest rates [Cox, J., Ingerson, J. and Ross, S., A theory of the term structure of interest rates. Econometrica, 1985, 53, 385–407]. This paper contributes to the existing literature four-fold by: (i) adapting the valuation technique to long-dated instruments; (ii) providing an adjustment to a series of points around which the power series expansion is performed; (iii) analysing the performance of different strategies for hedging European call options; (iv) applying the power series approach to the valuation of guaranteed minimum accumulation benefit riders embedded in variable annuity contracts. Our results demonstrate a high computational efficiency of the power series approximation method for evaluation of derivative prices and hedge ratios.

Factors affecting the development of the Vietnamese derivative securities market

In the context of integration, the capital market has important implications for strengthening economic resources for development. This becomes even more important as the derivative securities market has recently emerged in some countries. It is an opportunity for countries to approach many capital sources, especially foreign capital. The objective of this paper is to identify factors affecting the development of Vietnamese derivative financial markets. The paper uses exploratory factor analysis and ordinary least squares to test the model. A survey sample includes 152 managers and experts of Vietnamese derivative securities companies in 2019. The results show that the International integration factor has the same direction, while the Legal environment factor has an adverse impact on the development of the Vietnamese derivative securities market. Therefore, Vietnamese regulatory bodies should amend some laws to create stability in the legal corridor, and state management agencies in the country need the orientation and the international integration strategy to attract financial resources for the development of Vietnam’s economy.

The Role of Options in Goals-Based Wealth Management

We develop a facile methodology using dynamic programming for goals-based wealth management over long horizons where rebalancing uses the standard securities and also derivative securities. A kernel density estimation approach is developed to accommodate any number of derivative assets, solving a high dimensional problem with fast computation. The approach easily accommodates skewed and fat-tailed distributions. Portfolio performance is much better with the use of options, especially for investors with aggressive goals.

Equal risk pricing of derivatives with deep hedging

This article provides a universal and tractable methodology based on deep reinforcement learning to implement the equal risk pricing framework for financial derivatives pricing under very general conditions. The equal risk pricing framework entails solving for a derivative price which equates the optimally hedged residual risk exposure associated, respectively, with the long and short positions in the contingent claim. The solution to the hedging optimization problem considered, which is inspired from the [Marzban, S., Delage, E. and Li, J.Y., Equal risk pricing and hedging of financial derivatives with convex risk measures. arXiv preprint arXiv:2002.02876, 2020.] framework relying on convex risk measures, is obtained through the use of the deep hedging algorithm of [Buehler, H., Gonon, L., Teichmann, J. and Wood, B., Deep hedging. Q. Finance, 2019, 19, 1271–1291]. Consequently, the current paper's approach allows for the pricing and the hedging of a very large number of contingent claims (e.g. vanilla options, exotic options, options with multiple underlying assets) with multiple liquid hedging instruments under a wide variety of market dynamics (e.g. regime-switching, stochastic volatility, jumps). A novel ε-completeness measure allowing for the quantification of the residual hedging risk associated with a derivative is also proposed. The latter measure generalizes the one presented in [Bertsimas, D., Kogan, L. and Lo, A.W., Hedging derivative securities and incomplete markets: an ε-arbitrage approach. Oper. Res., 2001, 49, 372–397.] based on the quadratic penalty. Monte Carlo simulations are performed under a large variety of market dynamics to demonstrate the practicability of our approach, to perform benchmarking with respect to traditional methods and to conduct sensitivity analyses. Numerical results show, among others, that equal risk prices of out-of-the-money options are significantly higher than risk-neutral prices stemming from conventional changes of measure across all dynamics considered. This finding is shown to be shared by different option categories which include vanilla and exotic options.

금리연계 파생결합증권의 투자효과에 관한 연구

금리연계 파생결합증권의 투자효과에 관한 연구

The Impact of Option Introduction on Real Estate Investment Trusts

This paper examines the impact of option introduction on the returns, volatility, and volume of shares traded of the Real Estate Investment Trusts (REITs) that underlie the new derivative securities. The paper looks at both the initial and then longer term impact on each of these variables and then compares the impact to what previous research finds when options are introduced on non-REIT equities. We find evidence of an initial decline in price when option introduction is announced and also find significant negative returns over a longer post-announcement period. There is not a significant change in volatility at option introduction but we do find a significant increase in trading volume. We find that in most of the areas examined, REITs have a similar reaction to option introduction as do non-REIT equities.

Complexity as a Proxy for Risk when Evaluating Derivative Securities

While derivative securities are a critical component of the global economy, the complexity of derivatives is decried as a contributor to financial crises and investor losses. However, derivative complexity is not necessarily related to risk. In this paper, we use four experiments to investigate whether and why complexity is interpreted as a key risk determinant when evaluating derivatives. Our first two experiments show a robust effect consistent with investors and managers interpreting complexity as a key risk determinant and deeming more complex, but equally risky, derivatives as more risky. Our next two experiments provide evidence that the effect is driven by attribute substitution. Altogether, our results shed light on how derivatives are evaluated and suggest an important potential source of misinterpretations of disclosures provided under US GAAP (ASC 815-10-50).

European call price modelling using neural networks in considering volatility as stochastic with comparison to the Heston model

ABSTRACTThe aim of this paper is to model the European call price using neural networks (NNs). Many existing works have treated the problem as Hutchinson et al. [(1994). A nonparametric approach to pricing and hedging derivative securities via learning networks. J Finance. 49(3):851–889] Compared to these previous studies, the originality of our work consists in considering the volatility as stochastic and then to compare the NN’s results to those of Heston (1993) model rather than to those of Black and Scholes [(1973 May–Jun). The pricing of options and corporate liabilities. J Polit Econ. 81(3):637–654)] as Hutchinson et al. did. We base our empirical work on real data (12 contracts on CAC40 index from the period January 2005 to January 2007). We found that the NNs approach gives better performances than the Heston’s, in terms of accuracy and convergence speed.

Trading with small nonlinear price impact

We study portfolio choice with small nonlinear price impact on general market dynamics. Using probabilistic techniques and convex duality, we show that the asymptotic optimum can be described explicitly up to the solution of a nonlinear ODE, which identifies the optimal trading speed and the performance loss due to the trading friction. Previous asymptotic results for proportional and quadratic trading costs are obtained as limiting cases. As an illustration, we discuss how nonlinear trading costs affect the pricing and hedging of derivative securities and active portfolio management.

Stock Loan Lotteries and Individual Investor Welfare

I propose and model stock loan lotteries, a financial innovation that improves the welfare of individual investors. Stock loan lotteries are prize-linked payoffs using net rebates from securities lending. Stock loan lotteries motivate individual investors with prospect theory preferences to buy and hold risky assets with high expected returns. Stock loan lotteries provide the greatest welfare benefit to poor investors and have greater welfare benefits in a model with realistic market frictions. I propose a method for exchanges to bypass legal and regulatory hurdles by structuring stock loan lottery tickets as derivative securities.

Finite Difference Method for the Multi-Asset Black–Scholes Equations

In this paper, we briefly review the finite difference method (FDM) for the Black–Scholes (BS) equations for pricing derivative securities and provide the MATLAB codes in the Appendix for the one-, two-, and three-dimensional numerical implementation. The BS equation is discretized non-uniformly in space and implicitly in time. The two- and three-dimensional equations are solved using the operator splitting method. In the numerical tests, we show characteristic examples for option pricing. The computational results are in good agreement with the closed-form solutions to the BS equations.

Credit Risk in Derivative Securities - A Simplified Approach

The pricing of options and other derivatives which are subject to the default risk of the writer usually requires the calibration of a sophisticated model and substantial effort in determining the input parameters. In empirical research, this effort is often avoided, and a basic approach that assumes independence of credit risk and market risk is applied. In this note, we propose a very simple method to incorporate correlated credit risk in the pricing of vulnerable derivatives. The approach is based on some approximations of more sophisticated models and requires the correlation between the underlying of the derivative and its writer as the only additional input parameter. It is therefore easily applicable and maintains the accuracy of sophisticated models to a large extent, as shown in numerical studies for call options, put options, and discount certificates.

REVIEW OF THE FUNCTIONING AND DEVELOPMENT OF THE DERIVATIVES MARKET

The article draws attention to a specific market of derivative securities - the derivatives market. At the present stage of development of communication technologies, there is a steady increase in the general trend of direct participation of individuals in financial transactions using electronic platforms. In particular, there is an interest in the participation of Ukrainian citizens in operations on world stock markets. It is emphasized that relatively technically easy access to participation in financial transactions through the use of electronic platforms is currently a potential threat to financial security for the funds of participants in such transactions. This is due to the weak professional training of most domestic financial professionals to assess the capabilities of the derivatives market, as well as to participate in transactions with them. It is emphasized that stock exchange operations on stock markets, purchase and sale of derivatives on electronic platforms, require, along with general, also special knowledge on certain specific areas of economic development and financial relations. From the standpoint of such trends, this review article is proposed. The article provides a brief overview of the functioning of the derivatives market (derivatives) in order to get acquainted with the principles of its operation, as well as with the most common strategies and related terms. The article mentions four main types of derivative contracts: forwards, futures, options and swaps. It is noted that the vast majority of derivative products are valued at five main asset classes: equity, fixed income instrument, commodity, foreign currency and credit event. Mechanisms of trading in derivative securities, which are divided into exchange and over-the-counter, are considered. Historical examples of negative and positive transactions with derivatives are given. The conclusion emphasizes that the economic potential of the stock market of financial derivatives does not appear at the same time as a result of the adoption of legislation. This potential is gradually formed as a set of market opportunities, competitive advantages, means and sources of development of stock exchanges. The formation of the economic potential of the stock market of financial derivatives involves the implementation of a set of coordinated organizational and economic transformations, which are carried out with the active support of regulatory authorities.

TO THE QUESTION ON ECONOMIC AND LEGAL SECURITY OF THE USE OF BINARY OPTIONS AS FINANCIAL INSTRUMENTS

The article investigates the current state of economic and legal support for the use of binary options as financial instruments. On the basis of the conducted research, the concept of binary option as derivative security and the financial instrument is specified, the main types of binary options are distinguished. Also, the article investigates features of the functioning of the binary options market through online trading platforms. The legal nature of the binary option as a derivative of security and a financial instrument (item 5 of Part 5 of Article 3 of the Law of Ukraine “On Securities and the Stock Market”) is specified. There is no comprehensive list of such securities in the legislation. That is, based on the features of the binary option (timeliness; purchase or sale of any of the financial instruments, including those that provide cash payment; no actual purchase of securities, currency or precious metals, raw materials; availability of a certain fixed condition at the time conclusion of the transaction; short-term and speculative nature of the financial transaction; trading on online platforms). The concept of a binary option has been clarified, namely: this is the type of options contract (contract) under which the payment will depend entirely on the result of the offer, yes or no, usually related to whether the price of a particular asset such as a stock or commodity will rise above or will decrease below the amount indicated. Unlike traditional options, when such an agreement is concluded, no actual purchase of a security, precious metal, raw materials is made, but a bid is made to increase or decrease the price of the asset for a certain time. Based on an analysis of EU law, including the MIFID, it is determined that binary options refer to derivative financial instruments. The peculiarities of economic and legal regulation of the binary options market are investigated by the European Securities Market Supervision Authority (ESMA). There is a lack of proper regulation and control over the binary options market by the state in Ukraine, which in turn led to an outflow of tens of millions of dollars from the Ukrainian economy and causing significant financial losses to traders. The article argues the feasibility of adopting a special law on the market for binary options based on the experience of the Federal Republic of Germany to protect Ukrainian traders. Keywords: binary option, financial instrument, trader, trading online platforms, ESMA, MIFID.

Esposito's temporality of finance: Endogeneity and revisability in derivative transactions

AbstractRecent years have seen greater interest in the theoretical foundations of abstract finance and their intersection with questions of philosophy and sociology. In particular, exchanges between authors such as Donald MacKenzie, Timothy Johnson, Elie Ayache, and others have debated the deterministic or contingent dynamics of markets, as well as their interdependency with the theories that purport to describe them. Working in this tradition, Elena Esposito raises a novel question in her 2011 book, The Future of Futures: could the exchange of derivative securities within financial markets entail not so much the provision of liquidity, but the transaction of time? In this article, I reconstruct Esposito's analysis, arguing that the proper response to this question should be affirmative. Particular emphasis is laid on what I take to be the two fundamental and controversial premises which support this argument: first, the endogeneity of time-relations involved in financial markets; and second, the revisability of these time- relations. The advantage of recasting Esposito's position in this way is the defence it enables against various criticisms articulated in theory and philosophy circles, such as those of Ray Brassier. Finally, I discuss the significance of Esposito's theory, not only for this class of financial transactions, but also for certain issues in the philosophy of time.

ДЕРИВАТИВИ ЯК ФІНАНСОВІ ІННОВАЦІЇ ФІКТИВНОГО КАПІТАЛУ

The article considers the economic nature of derivatives as financial innovations of fictitious capital. Their essence and various classification forms are characterized. It is determined that derivatives are used mainly for risk hedging, as well as for the implementation of investment strategy. Derivatives as innovative financial products are formed as a result of specific relations of economic entities in the process of their innovative activity in the financial market. These relationships allow to meet the needs associated with the search for sources of funding, involve virtually unlimited opportunities for variation in the amount of risk and its redistribution, provide liquidity and increase the final financial results. By setting future prices, participants in futures contracts can plan their activities in the future. Prices in this market are a kind of indicator of the future state of the economy. The development of the derivatives market in Ukraine is slow, and is accompanied by low trading volumes and a rather limited range of derivative securities used as a hedging instrument, so it is important to study global trends in its operation at the present stage. In the context of financial globalization, derivatives are an integral part of global capital markets, and derivatives help a wide range of end users to manage risk and improve profits. Participants in the global derivatives market say that their liquidity remains unchanged or improves in 2019, with more than 80% expecting the same in 2020. Such positive sentiment from end consumers, investors, clearing companies, brokers, traders and exchanges, participating in global derivatives markets is an indicator of high confidence. The analysis of the functioning of the world derivatives market and the development of the derivatives market in Ukraine is carried out. Positive and negative tendencies of development of this market are revealed. The main problematic aspects that hinder the effective operation of the domestic derivatives market are outlined. Based on the analysis of the state and dynamics of the derivatives market in Ukraine, the main directions of its development are proposed.

DIALECTICS OF THE ECONOMIC ESSENCE OF DERIVATIVES

The economic essence of derivatives has been clarified for the correct classification of their types, determination of components and mechanism of action of the derivatives market, development of basic concepts of derivatives pricing by the realities of the Ukrainian economy. The views of the leading scientists of the world on derivatives determination are investigated. The incorrectness of the term urgent derivatives concept has been proved since the economic nature of derivatives already implies urgency. The objection to the definition of a derivative as a “standard-form financial instrument belonging to the category of “derivative securities” (or second-tier securities) confirming the right or obligation of its owner to buy or sell securities, currency, commodities or intangible assets is justified, on predefined terms, in the future”. It is determined, first, that derivatives may have a non-standard form, in particular over-the-counter (OTC) derivatives; secondly, they do not belong to derivatives, since the latter are lower-tier counterfeit titles compared to derivatives; third, it is unclear what is the meaning of the category “second-tier securities”, since it is not specified what is the second-tier. It is proved that the definition of derivatives due to the peculiarities of their market mechanism, pricing, structural elements is not fully determined since the features should be substantive, and not vice versa – to determine the object. The results of the study of the dialectics of the economic nature of derivatives have shown that the terms “derivative”, “fixed-term financial instrument”, “derivative securities”, “fixed-term contract” are used as synonyms. It is substantiated that the use of different definitions leads to contradictions of general economic, legal and organizational nature, which slows down and distorts the development of the derivatives market of Ukraine. The conciseness and content of the definition of the following types of derivatives are substantiated: forward contracts, futures contracts, options contracts, contract swaps. It is proposed to identify the main types of “financial derivatives”. The feasibility of considering derivatives in two aspects has been proved. In the narrow sense, these are fixed-term contracts (forwards, futures, options, and swaps) and the specific terms of their conclusion and performance. In a broad sense, derivatives cover all types of fixed-term contracts, secondary securities, as well as products of modern financial engineering technologies, including structured, hybrid, synthetic financial instruments. Key words: derivative, fixed-term contract, security, financial instrument.