Creating portfolio risk and return models [28]

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Bullet points include: Formally equivalent in most cases to option pricing models Often the aim is to price guarantees and other option-like elements in liabilities Hybrid and more complicated models may be relevant where option includes (longer-term) equity and interest rate sensitivity, e.g. (potentially) value of sponsor covenant to a pension fund Means that in principle could also apply some of the more complicated option pricing techniques e.g.: Laplace and Fourier transforms, convolutions Structural versus reduced form credit risk models Scenario within scenario modelling computationally challenging

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