On Exponential Approximation to the Hockey Stick Function

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On Exponential Approximation to the Hockey Stick Function

by Ian Iscoe of Algorithmics, Inc.,
Ken Jackson of the University of Toronto,
Alex Kreinin of Algorithmics, Inc., and
Xiaofang Ma of the University of Toronto

January 24, 2007

Abstract: The hockey stick function is a basic function in pricing and risk management of many financial derivatives. This paper considers approximating the hockey stick function by a sum of exponentials. The algorithm proposed by Beylkin and Monzón is used to determine the parameters of an approximation. Theoretical properties of the approximation are studied. Numerical results are presented.

JEL Classification: G13.

Keywords: Synthetic CDO, hockey stick function, exponential approximation.

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