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By reinterpreting the calibration of structural models, a reassessment of the importance of the input variables is undertaken. The analysis shows that volatility is the key parameter to any calibration exercise, by several orders of magnitude. To maximize the sensitivity to volatility, a simple formulation of Merton's model is proposed that employs deep out-of-the-money option implied volatilities. The methodology also eliminates the use of historic data to specify the default barrier, thereby leading to a full risk-neutral calibration. Subsequently, a new technique for identifying and hedging capital structure arbitrage opportunities is illustrated. The approach seeks to hedge the volatility risk, or vega, as opposed to the exposure from the underlying equity itself, or delta. The results question the efficacy of the common arbitrage strategy of only executing the delta hedge. [ABSTRACT FROM AUTHOR]

Riemann’s method is one of the definitive ways of solving Cauchy’s problem for a second order linear hyperbolic partial differential equation in 2 variables. Chaundy’s equation, with 4 parameters, is the most general self-adjoint equation for which the Riemann function is known. Here we show that Chaundy’s equation possesses a two-dimensional vector space of second-order symmetry operators. Hence a new equivalence class of Riemann functions, admitting no first-order symmetries and obtainable only via a higher order symmetry, is found. A new 5 parameter Riemann function is then subsequently derived. © 2004 American Institute of Physics. [ABSTRACT FROM AUTHOR]

Historically Lie algebras of first-order symmetry operators have proven to be a useful method for finding equivalence classes of Riemann functions. Here this idea is extended to higher order symmetries. The approach is to seek self-adjoint linear hyperbolic partial differential equations that separate variables in more than one coordinate system under the action of the group E(1,1). The equations derived admit no nontrivial first-order operators and can only be obtained from second-order symmetry operators. Using this symmetry structure, a new equivalence class of Riemann functions can then be found. © 2004 American Institute of Physics. [ABSTRACT FROM AUTHOR]

Riemann's method is one of the definitive ways of solving Cauchy's problem for a second order linear hyperbolic partial differential equation in two variables. The first review of Riemann's method was published by E.T. Copson in 1958. This study extends that work. Firstly, three solution methods were overlooked in Copson's original paper. Secondly, several new approaches for finding Riemann functions have been developed since 1958. Those techniques are included here and placed in the context of Copson's original study. There are also numerous equivalences between Riemann functions that have not previously been identified in the literature. Those links are clarified here by showing that many known Riemann functions are often equivalent due to the governing equation admitting a symmetry algebra isomorphic to S L (2 , R) . Alternatively, the equation admits a Lie-Bäcklund symmetry algebra. Combining the results from several methods, a new class of Riemann functions is then derived which admits no symmetries whatsoever. [ABSTRACT FROM AUTHOR]