Derivatives -- the View from the Trenches

Models that Work at Work
Interest rates
- Use normal -- not log normal models.
- Or better yet, models that can slide between normality and
log normality.
- If feasible add stochastic volatility to capture smile.
- Use a moderate number of factors 1-2.
- Have several models and benchmark them against each
other
Equities
- Use log-normal models with jumps.
- Use common jumps to capture big market moves.
- Only add stochastic volatility if you have nothing else to
do.
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