No-arbitrage theorem for multi-factor uncertain stock model with floating interest rate

In the stock models, the prices of the stocks are usually described via some differential equations. So far, uncertain stock model with constant interest rate has been proposed, and a sufficient and necessary condition for it being no-arbitrage has also been derived. This paper considers the multiple risks in the interest rate market and stock market, and proposes a multi-factor uncertain stock model with floating interest rate. A no-arbitrage theorem is derived in the form of determinants, presenting a sufficient and necessary condition for the new stock model being no-arbitrage. In addition, a strategy for the arbitrage is provided when the condition is not satisfied.     

A Markov decision problem in a risk model with interest rate and Markovian environment

We consider the compound binomial model in a Markovian environment presented by Cossette et al.(2004). We modify the model via assuming that the company receives interest on the surplus and a positive real-valued premium per unit time, and introducing a control strategy of periodic dividend payments. A Markov decision problem arises and the control objective is to maximize the cumulative expected discounted dividends paid to the shareholders until ruin minus a discounted penalty for ruin. We show that under the absence of a ceiling of dividend rates the optimal strategy is a conditional band strategy given the current state of the environment process. Under the presence of a ceiling for dividend rates, the character of the optimal control strategy is given. In addition, we offer an algorithm for the optimal strategy and the optimal value function.Numerical results are provided to illustrate the algorithm and the impact of the penalty.     

Valuation of interest rate ceiling and floor in uncertain financial market

The interest rate ceiling and floor are the popular interest rate derivatives in a financial market. In this paper, the valuation of interest rate ceiling and floor is investigated by using uncertainty theory. Different from the classical stochastic interest rate models, the uncertain interest rate model is used in this paper as the basis of evaluating the interest rate ceiling and floor. Based on the assumption that the short interest rate follows uncertain differential equations, the price formulas of interest rate ceiling and floor are derived.     

Decision making on stock levels in cases of uncertain demand rate

Inventory control is a typical problem of decision making. In this paper a periodic replenishment of stock, the spare parts being of one kind, is discussed for some cases when the demand rate is uncertain. The first decision, before all others in the sequence, is done by assuming an a priori distribution of demand rate. In time, as the demand process goes on, corrections of parameters of the a priori distribution are made according to the accumulated knowledge about past demand. This Bayesian approach to decision making based on learning about the uncertain demand rate is known for the case when the demand rate is unknown but constant. It is shown that this same approach can be used in some cases when the demand rate is unknown and not constant. Results are given and used for inventory control.     

Ruin probability in a one-sided linear model with constant interest rate

This paper investigates the ruin probability of a generalized renewal model with a constant interest rate, in which a one-sided linear model is used for the dependent claim process. An explicit asymptotic formula and an exponential upper bound are obtained for the ruin probability.     

An optimal portfolio model with stochastic volatility and stochastic interest rate

We consider a portfolio optimization problem under stochastic volatility as well as stochastic interest rate on an infinite time horizon. It is assumed that risky asset prices follow geometric Brownian motion and both volatility and interest rate vary according to ergodic Markov diffusion processes and are correlated with risky asset price. We use an asymptotic method to obtain an optimal consumption and investment policy and find some characteristics of the policy depending upon the correlation between the underlying risky asset price and the stochastic interest rate.     

Optimal investment consumption model with a higher interest rate for borrowing

This paper considers a consumption and investment decision problem with a higher interest rate for borrowing as well as the dividend rate. Wealth is divided into a riskless asset and risky asset with logrithmic Erownian motion price fluctuations. The stochastic control problem of maximizating expected utility from terminal wealth and consumption is studied. Equivalent conditions for optimality are obtained. By using duality methods ,the existence of optimal portfolio consumption is proved,and the explicit solutions leading to feedback formulae are derived for deteministic coefficients.     

On a multiple credit rating migration model with stochastic interest rate

In this paper, we explore a pricing model for corporate bond accompanied with multiple credit rating migration risk and stochastic interest rate. The bond price volatility strongly depends on potentially multiple credit rating migration and stochastic change of interest rate. A free boundary problem of partial differential equation is presented, which is the equivalent transformation of the pricing model. The existence, uniqueness, and regularity for the free boundary problem are established to guarantee the rationality of the pricing model. Due to the stochastic change of interest rate, the discontinuous coefficient in the free boundary problem depends explicitly on the time variable but is convergent as time tends to infinity. Accordingly, an auxiliary free boundary problem is constructed, whose coefficient is the convergent limit of the coefficient in the original free boundary problem. With some constraint on the risk discount rate satisfied, we prove that a unique traveling wave exists in the auxiliary free boundary problem. The inductive method is adopted to fit the multiplicity of credit rating. Then we show that the solution of the original free boundary problem converges to the traveling wave in the auxiliary free boundary problem. Returning to the pricing model with multiple credit rating migration and stochastic interest rate, we conclude that the bond price profile can be captured by a traveling wave pattern coupling with a guaranteed bond price with face value equal to one at the maturity.     

Pricing model of interest rate swap with a bilateral default risk

Under the foundation of Duffie & Huang (1996) [7], this paper integrates the reduced form model and the structure model for a default risk measure, giving rise to a new pricing model of interest rate swap with a bilateral default risk. This model avoids the shortcomings of ignoring the dynamic movements of the firm’s assets of the reduced form model but adds only a little complexity and simplifies the pricing formula significantly when compared with Li (1998) [10]. With the help of the Crank-Nicholson difference method, we give the numerical solutions of the new model to study the default risk effects on the swap rate. We find that for a one year interest rate swap with the coupon paid per quarter, the variance of the default fixed rate payer decreases from 0.1 to 0.01 only causing about a 1.35%’s increase in the swap rate. This is consistent with previous results.     

A note on a dependent risk model with constant interest rate

For a dependent risk model with constant interest rate, in which the claim sizes form a sequence of upper tail asymptotically independent and identically distributed random variables, and their inter-arrival times are another sequence of widely lower orthant dependent and identically distributed random variables, we will give an asymptotically equivalent formula for the finite-time ruin probability. The obtained asymptotics holds uniformly in an arbitrarily finite-time interval.     

Ruin problems for a discrete time risk model with random interest rate

In this paper, we study a discrete time risk model with random interest rate. The convergence of the discounted surplus process is proved by using martingale techniques, an expression of ruin probability is obtained, and bounds for ruin probability are included. In the second part of the paper, the distribution of surplus immediately after ruin, the distribution of surplus just before ruin, the joint distribution of the surplus immediately before and after ruin, and the distribution of ruin time are discussed.     

Risk-neutral valuation of participating life insurance contracts in a stochastic interest rate environment

Over the last years, the valuation of life insurance contracts using concepts from financial mathematics has become a popular research area for actuaries as well as financial economists. In particular, several methods have been proposed of how to model and price participating policies, which are characterized by an annual interest rate guarantee and some bonus distribution rules. However, despite the long terms of life insurance products, most valuation models allowing for sophisticated bonus distribution rules and the inclusion of frequently offered options assume a simple Black–Scholes setup and, more specifically, deterministic or even constant interest rates.We present a framework in which participating life insurance contracts including predominant kinds of guarantees and options can be valuated and analyzed in a stochastic interest rate environment. In particular, the different option elements can be priced and analyzed separately. We use Monte Carlo and discretization methods to derive the respective values.The sensitivity of the contract and guarantee values with respect to multiple parameters is studied using the bonus distribution schemes as introduced in [Bauer, D., Kiesel, R., Kling, A., Ruß, J., 2006. Risk-neutral valuation of participating life insurance contracts. Insurance: Math. Econom. 39, 171–183]. Surprisingly, even though the value of the contract as a whole is only moderately affected by the stochasticity of the short rate of interest, the value of the different embedded options is altered considerably in comparison to the value under constant interest rates. Furthermore, using a simplified asset portfolio and empirical parameter estimations, we show that the proportion of stock within the insurer’s asset portfolio substantially affects the value of the contract.     

Uncertain fractional differential equations and an interest rate model

The concept of uncertain fractional differential equation is introduced, and solutions of several uncertain fractional differential equations are presented. This kind of equation is a counterpart of stochastic fractional differential equation. By the proposed concept, an interest rate model is considered, and the price of a zero‐coupon bond is obtained. Copyright © 2014 John Wiley & Sons, Ltd.     

Numerical simulation of a strongly nonlinear Ait-Sahalia-type interest rate model

We are interested in the strong convergence of Euler-Maruyama type approximations to the solution of a class of stochastic differential equations models with highly nonlinear coefficients, arising in mathematical finance. Results in this area can be used to justify Monte Carlo simulations for calibration and valuation. The equations that we study include the Ait-Sahalia type model of the spot interest rate, which has a polynomial drift term that blows up at the origin and a diffusion term with superlinear growth. After establishing existence and uniqueness for the solution, we show that an appropriate implicit numerical method preserves positivity and boundedness of moments, and converges strongly to the true solution.     

A robust optimization model for a cross-border logistics problem with fleet composition in an uncertain environment

Since the implementation of the open-door policy in China, many Hong Kong-based manufacturers' production lines have moved to China to take advantage of the lower production cost, lower wages, and lower rental costs, and thus, the finished products must be transported from China to Hong Kong. It has been discovered that logistics management often encounters uncertainty and noisy data. In this paper, a robust optimization model is proposed to solve a cross-border logistics problem in an environment of uncertainty. By adjusting penalty parameters, decision-makers can determine an optimal long-term transportation strategy, including the optimal delivery routes and the optimal vehicle fleet composition to minimize total expenditure under different economic growth scenarios. We demonstrate the robustness and effectiveness of our model using the example of a Hong Kong-based manufacturing company. The analysis of the trade-off between model robustness and solution robustness is also presented.     

The pricing of credit risky securities under stochastic interest rate model with default correlation

In this paper, we study the pricing of credit risky securities under a three-firms contagion model. The interacting default intensities not only depend on the defaults of other firms in the system, but also depend on the default-free interest rate which follows jump diffusion stochastic differential equation, which extends the previous three-firms models (see R.A. Jarrow and F.Yu (2001), S.Y.Leung and Y.K.Kwok (2005), A.Wang and Z.Ye (2011)). By using the method of change of measure and the technology (H. S.Park (2008), R.Hao and Z.Ye (2011)) of dealing with jump diffusion processes, we obtain the analytic pricing formulas of defaultable zero-coupon bonds. Moreover, by the “total hazard construction”, we give the analytic pricing formulas of credit default swap (CDS).     

On optimality in an uncertain environment

The main objective of this paper is to formulate an uncertain counterpart of a minimum-norm problem in the form of primary and secondary optimization problems using the concept of uncertain norms.This work was supported partly by the Committee of Scientific Research (KBN).     

A robust optimization model for multi-site production planning problem in an uncertain environment

This paper addresses the multi-site production planning problem for a multinational lingerie company in Hong Kong subject to production import/export quotas imposed by regulatory requirements of different nations, the use of manufacturing factories/locations with regard to customers’ preferences, as well as production capacity, workforce level, storage space and resource conditions at the factories. In this paper, a robust optimization model is developed to solve multi-site production planning problem with uncertainty data, in which the total costs consisting of production cost, labor cost, inventory cost, and workforce changing cost are minimized. By adjusting penalty parameters, production management can determine an optimal medium-term production strategy including the production loading plan and workforce level while considering different economic growth scenarios. The robustness and effectiveness of the developed model are demonstrated by numerical results. The trade-off between solution robustness and model robustness is also analyzed.