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3
votes
1answer
64 views

Pricing of a simple contingent claim

Earlier I had the question (5.11 Tomas Bjork): $$ \frac{\partial F}{\partial t}+\frac{1}{2}x^2\frac{\partial^2 F}{\partial t^2}+x = 0 $$ $$ F(T,x) = ln(x^2) $$ And solve it using Feynman-Kac. The ...
1
vote
0answers
47 views

Why is the LIBOR-market model free of arbitrage?

Recently I have been reading a lot on the market models. One thing that keeps escaping me - why is the Libor-market model (LMM) assumed to e free of aritrage in continuous time ? To me this means ...
1
vote
2answers
81 views

Harnessing small correlations for reliable profit

It is said that Edward O. Thorp was able to harness small correlations for reliable financial gain. I've seen some strategies based on strong correlations which did not seem particularly reliable. ...
0
votes
0answers
35 views

EMM in incomplete markets

The simply put question is as follows: do we need to restrict ourselves to EMM exclusively when pricing European contingent claims (=option payoffs) even if markets are incomplete? In particular, a ...
1
vote
1answer
75 views

Simple pricing example confusion

This it taken from "Heard on the Street", Section B. Consider a market with $0$ risk-free rate, no transactions costs etc. The IBM stock costs \$75 and does not pay dividends. Design a security ...
0
votes
1answer
119 views

Trading spot volatility

I am reading a paper that very briefly talks about some volatility arbitrage strategies. It's so brief that I do not exactly understand how it works. It says one of the strategy is based on "short ...
0
votes
0answers
46 views

Log returns vs. prices

I am currently working on a stat arb that is giving me a little bit of trouble. I'm under the impression that most stat arbs are going to use prices such that we can choose a ratio N such that: Price ...
0
votes
0answers
80 views

Calculating index arbitrage

I have a days-worth of level 2 market data. I am calculating S&P500 index arbitrage. I have a few questions about the calculation: 1) Should I be summing all the bids and asks from the stocks ...
1
vote
1answer
150 views

Derivation of the Nelson-Siegel model and proof of arbitrage

1. I am looking for a derivation of the Nelson-Siegel model $y(m)=a+b\left( \frac{1-e^{-\lambda m}}{\lambda m}\right)+c\left( \frac{1-e^{-\lambda m}}{\lambda m} -e^{-\lambda m} \right)$ It is ...
4
votes
0answers
46 views

FTAP in the model independent case, paper by Schachermayer

I have a question about the following paper by Beatrice Acciaio, Mathias Beiglböck, Friedrich Penkner, Walter Schachermayer. At the very beginning of the paper, on page 3, there are two definitions ...
1
vote
1answer
160 views

Arbirtage free price process question in Bjork's Arbitrage Theory in Continuous Time

I am currently working through questions in Bjork's Arbitrage Theory in Continuous Time. However, I am unable to solve the following question, 7.2 in the book. A solution would be greatly appreciated. ...
5
votes
1answer
134 views

Arbitrage with freshly issued bonds

I recently heard someone mention an arbitrage strategy involving selling freshly issued bonds and buying the "old batch" as it has shown that the liquidity in the fresh batch motivates/drives up these ...
0
votes
2answers
62 views

Calculate price of index from underlyings (weightings included)?

I have a day's worth of LSE data (FTSE100 companies) and I also have their weightings for the FTSE100. Ignoring the net present value of money, how do I calculate the current value of the FTSE? I ...
0
votes
1answer
251 views

Risk-free investment strategy for european call and put option

I have some trouble solving the following question: We have an european call and put option (with the same maturity date $T$ en strike $E=10$). The stock price now is $S=11$ and we use a continuous ...
0
votes
0answers
71 views

Problem with setting up an arbitrage

I have a problem setting up an arbitrage table. I have to prove this relation: $$C_0 + P_0 \geq (k_2 − k_1) e^{−rt}$$ where $C_0$ is the price of a call with strike $k_1$, $P_0$ is the price of a ...
2
votes
1answer
128 views

interest rate in cost of carry

What interest rates are used in practice in a stock index / futures arbitrage? I've seen cases, when the assumed rate is 3 months LIBOR, but does it mean, that everyone who does the arbitrage can ...
-1
votes
1answer
375 views

Calculating arbitrage- S&P 500 stocks vs S&P 500 Index future?

How exactly would I go about investigating whether the S&P 500 stocks were currently over-valued compared with the price of the S&P 500 Index futures contract? Is it just a case of taking each ...
2
votes
2answers
293 views

Index arbitrage with Options when not all underlyings have options listed?

One arbitrage strategy involves looking at the price of the Index Futures price compared with the prices of the options contracts for the underlyings. My question is, can this arbitrage strategy ...
1
vote
0answers
124 views

Example code for “Gauge Invariance, Geometry and Arbitrage” paper

This paper describes an algorithm for computing arbitrage opportunites using a gauge connetion. Has anyone written a python program or C++ or C# program that shows how to follow the steps outlines in ...
3
votes
1answer
446 views

Calculating most profitable arbitrage orders on multiple market with fixed and variable fees

If I have multiple markets (let's say 5, but the solution should be generic) trading the same stock/commodity/whatever, and the markets differ in both variable fees (which are in % of the trade order) ...
5
votes
1answer
469 views

Profiting from price discrepancies between stock exchanges

Here is an interesting video by Nanex: http://www.youtube.com/watch?&v=rB5jJuMP84E Perhaps some of you have already seen something similar. It is an animation of the order routing. It shows 1/2 ...
5
votes
1answer
762 views

Implied dividend estimation

I am looking at two different ways of estimating the expected / implied dividends from market data. 1. Dividend futures I know that this asset class is not very liquid and might not be ...
4
votes
1answer
1k views

Call option arbitrage opportunity

I am having trouble wrapping my head around some text provided to us by our lecturer (unfortunately he is currently unavailable). If we let $c$ be the price of a European call option, $S_0$ the ...
0
votes
1answer
354 views

main arbitrage & statistical arbitrage concepts

can we please summarise here some of the basic concepts, tools used in arbitrage and statistical arbitrage in real life? ARB: benefit from price difference on same asset ARB: difference between ...
2
votes
1answer
535 views

Multiple (linear) regression

I am looking for some inputs on a pair trading strategy that I am trying to improve with some semi-fundamental input. The basic idea is to use multiple linear regression to estimate the price of a ...
3
votes
1answer
674 views

Understanding Passive Rebate Arbitrage

I was reading a BMO paper which offered the following example of passive rebate arbitrage: "For example, if BBD.b is trading at $4.71 - ...
-4
votes
1answer
471 views

Show that convexity of call price as a function of the strike is violated [closed]

European call options with strikes 90, 100 and 110 on the same underlying asset and with the same maturity are trading for 22.50, 18.84 and 13.97 respectively. show that the convexity of the call ...
2
votes
2answers
394 views

.NET statistical packages recommendation

What open source or commercial .NET statistical package would you guys recommend? I am doing statistical arbitrage in options. The functions I need mainly are regressions, optimizations..etc. It would ...
6
votes
3answers
2k views

Why would a 6M LIBOR rate be significantly above 3M LIBOR, ED futures and swap rates?

Just was just looking at the various interest rates and noticed this: ...
3
votes
1answer
273 views

Sufficient conditions for no static arbitrage

In Carr and Madan (2005), the authors give sufficient conditions for a set of call prices to arise as integrals of a risk-neutral probability distribution (See Breeden and Litzenberger (1978)), and ...
3
votes
0answers
129 views

Arbitrage free price of a derivative when the price is collected over the lifetime of the derivative

Let $X_t$ be an american style financial derivative with random exercise time $T$ where $t$ and $T$ belongs to some finite set $A$. Buying this derivative requires the buyer to pay $p_t$ up to time ...
0
votes
1answer
147 views

help me compare methods to compute one instrument price from another instrument price

Assume we have two instruments A and B. Also time is increasing from 1 to n. Let's say that ...
-3
votes
1answer
441 views

Tutorial for working with tick data? [closed]

Can you recommend a good tutorial for working with tick data for the purpose of algorithmic trading? Is the data normally stored in a database and only bits are read into memory at a time? Is there ...
2
votes
2answers
668 views

Usefulness of simultaneously buying triangular and multiple arbitrages on the Forex

I have a limited financial background but I'm trying to figure out the usefulness of buying size-n arbitrages (n > 3), and I wonder the kind of risks - if any - associated with such a strategy. Say ...
1
vote
1answer
428 views

Arbitrage between markets

I'm trying to understand how arbitrage works, but I'm having some difficulties based on some restrictions: I have markets A, B and C. The currencies that are traded are X <-> Y, and X <-> Z. ...
13
votes
2answers
786 views

Why isn't the Nelson-Siegel model arbitrage-free?

Assume $X_t$ is a multivariate Ornstein-Uhlenbeck process, i.e. $$dX_t=\sigma dB_t-AX_tdt$$ and the spot interest rate evolves by the following equation: $$r_t=a+b\cdot X_t.$$ After solving for $X_t$ ...
7
votes
1answer
364 views

calculating arbitrage-free ranges based off outright, spread, and fly prices

This may be more applied math rather than finance focused, but I'm curious about using linear algebra techniques for generating possible arbitrage signals among outright instruments and spreads/flies ...
5
votes
2answers
349 views

A few questions about signs of the Greek letters

Rho is the partial derivative of the value of call option, $C$, w.r.t the riskfree interest rate $r$: $$\rho \equiv \frac{\partial C}{\partial r}$$ In the standard B-S formula this term is positive, ...
19
votes
1answer
1k views

How do different methods and techniques used in pairs trading compare?

I was going through the paper of Avellaneda (2008) on stat arb and I found it interesting that he uses asset returns vs. their respective ETFs to compute the s-score. I am wondering if anyone has ...
2
votes
1answer
187 views

How often do ETF creation units baskets change?

Large institutions can swap baskets of underlying securities for ETF shares that can then be traded on an exchange as part of arbitrage between the price of the basket and the ETF share price. These ...
2
votes
1answer
259 views

Where are creation units baskets for ETFs published?

Where can the specification of a creation unit basket for an ETF be found? This information is needed for calculating the arbitrage possible between the ETF instrument itself and the creation unit ...
8
votes
1answer
979 views

What is the average Sharpe ratio of volatility arbitrage funds?

Where can I get data on performance metrics for volatility arbitrage funds? I am trying to compare the Sharpe ratio of my strategy to those of the major players.
20
votes
2answers
2k views

How much data is needed to validate a short-horizon trading strategy?

Suppose one has an idea for a short-horizon trading strategy, which we will define as having an average holding period of under 1 week and a required latency between signal calculation and execution ...
4
votes
2answers
374 views

What does put-call parity imply about option premiums?

We know that $$C-P = PV(F_{0,T}-K)$$ When we create a synthetic forward, we buy call and sell a put at the same strike price $K$. When we buy the call why do we assume the premium is positive? When ...
4
votes
1answer
486 views

What research is available on the performance of convertible bond arbitrage models?

The basic principles of convertible bond arbitrage have been clear at least since Thorp and Kassouf (1967). For those who are not familiar, the arbitrage entails purchasing a convertible bond and ...
18
votes
3answers
760 views

How can an ETF outperform its benchmark index?

Deutsche Bank’s ETF platform, db X-trackers, provides a rather remarkable ETF tracking Euro Stoxx 50 (which is the most widely used regional blue-chip index in Europe). What makes it remarkable is ...
11
votes
4answers
4k views

Is statistical arbitrage on FX possible?

Do you know of any papers which consider pairs trading (or statistical arbitrage) on foreign exchange? I couldn't find any. I asked this question on several forums and got no reply. Thus I guess this ...
9
votes
5answers
1k views

When to shut down a trend following strategy?

Suppose I have trend following strategy(on close to close data) that is not getting acceptable returns for some time. When should I start thinking about shutting it down?
4
votes
3answers
2k views

Arbitraging OANDA continuous rollover vs other brokers' discrete rollover

Most brokers compute rollover once a day (2200 GMT), but OANDA calculates it continuously. I thought I'd cleverly found an arbitrage opportunity, but it turns out OANDA knows about this and ...
5
votes
1answer
489 views

USDCAD options vs CADUSD options arbitrage?

I think I've found an arbitrage opportunity. Right now, I can do this (first via CME, second via SAXO) : BUY CADUSD AMERICAN PUT 10200 STRIKE EXPIRING 16 MAR 2011 FOR 53 pips USD SELL USDCAD ...