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60
votes
13answers
12k views

Innovative ways of visualizing financial data

Finance is drowning in a deluge of data. Humans are not very good at comprehending large amounts of data. One way out may be visualization. Traditional ways of visualizing patterns, complexities and ...
11
votes
2answers
809 views

Quantitative Derivatives Trading vs. Time

Most quantitative investment strategies focus on the changing prices of a commodity or equity over time. Derivatives, however, make this more complicated. How can I apply quantitative strategies to ...
11
votes
1answer
657 views

Probability distribution of maximum value of binary option?

A binary option with payout \$0/\$100 is trading at \$30 with 12 hours to expiration. Assuming the underlying follows a geometric Brownian motion (hence volatility remains constant), what ...
10
votes
3answers
2k views

How to estimate real-world probabilities

In the world of finance, Risk-neutral pricing allow us to estimate the fair value of derivatives using the risk free rate as the expected return of the underlyings. However, the behavior of ...
10
votes
2answers
3k views

Why a self-financing replicating portfolio should always exist?

According to my understanding the derivation of the Black-Scholes PDE is based on the assumption that the price of the option should change in time in such a way that it should be possible to ...
10
votes
2answers
508 views

Stochastic modelling of derivatives on dividends

I consider pricing and risk analysis of derivatives on dividends of the members of equity indices (such as Dow Jones EuroStoxx). There are options but I focus on futures. What are common stochastic ...
8
votes
2answers
534 views

What are the major models for energy derivatives, particularly electricity derivatives?

Aside from Black-Scholes with crazy skews, what major models are used for energy derivatives? I'm thinking particularly of electricity derivatives, but I'm also interested in natural gas and other ...
7
votes
4answers
937 views

What is the connection between default probabilities calculated using the credit rating and the price of a CDS?

I'm working on a tool to price Credit Default Swaps. I've already done the standard pricing tools. I'm working on a pricing tool which uses the credit rating for the default probabilities used in the ...
7
votes
3answers
234 views

New ways of communicating risk

One of the scapegoats of the financial crisis was value at risk. Still communicating risks effectively to clients is a big challenge and hugely important (also to keep your job as a quant!) In this ...
7
votes
2answers
301 views

Why does the price of a derivative not depend on the derivative with which you hedge volatility risk?

I'm trying to derive the valuation equation under a general stochastic volatility model. What one can read in the literature is the following reasoning: One considers a replicating self-financing ...
6
votes
2answers
2k views

Why is the SABR volatility model not good at pricing a constant maturity swap (CMS)?

I have heard that the SABR volatility model was not good at pricing a constant maturity swap (CMS). How is that?
6
votes
2answers
221 views

Are there financial instruments that make a bet on traded volume instead of price or its derivatives?

For most financial instruments we can go long or short and make a bet on the price. In the case of options we can bet on derivatives of price and other factors (e.g., interest rates). Is there an ...
6
votes
1answer
1k views

About Option Adjusted Spread, rate curves and bonds comparison

I have few questions about using OAS as a measure of risk: does OAS allow for comparison between bonds with and without embedded options (e.g. a callable bond against a plain vanilla one against a ...
6
votes
1answer
5k views

What is a self-financing and replicating portfolio?

I try to understand the derivation of the Black-Scholes equation based on the "constructing a replicating portfolio". From mathematical point of view it looks simple. We assume that: Stock prices ...
6
votes
1answer
151 views

Why Must Dividends Be Reinvested to Use Risk-Neutral Pricing?

Assume the price of a stock $S_t$ paying continuous dividend $a$ satisfies $$ dS_t = S_t\left((\mu - a)dt + \sigma dW_t\right). $$ The risk-neutral pricing formula states that if $\mathbb{Q}$ is any ...
6
votes
1answer
73 views

Calibration of nested pricing models consistently on two different classes of derivatives

Hi everyone, I'm programming in MATLAB and I have the following optimization problem in calibrating several nested specifications of pricing models. Summary: I have two pricing models ($1$ and $2$, ...
6
votes
2answers
105 views

How to price an European Call/Put Option of a jump difussion Process?

Lets have the next jump difussion Stochastic Process: $$S_t = S_0 e^{\sigma W_t + (v-\frac{\sigma ^2}{2})t}\prod_{i=1}^{N_t}(1+J_i)$$ where $W_t$ is the Brownian Motion, hence $G_t \equiv e^{\sigma ...
6
votes
1answer
358 views

How to estimate CVA by valuing a CDS of the counterparty?

I'm trying to estimate CVA of one of my derivatives by valuing a credit default swap (CDS) of my counterparty. However, I don't know how to set up the CDS deal (notional amount, maturity, etc.). ...
6
votes
0answers
624 views

option chain data visualization, sunburst

I think option chains are not represented in the best way. With more and more options products coming out and trading on the various exchanges, I see vendors struggling to keep up with a good way to ...
5
votes
3answers
233 views

Present and future role of pricing quants

While looking up on quants, I came across many sources that cited 'pricing quants' as one of the biggest chunks among all quant positions. But then I also came across many software companies providing ...
5
votes
1answer
1k views

On short-rate-models: Black-Karasinski (with constant parameters) compared to Vasicek

When modelling the term structure of interest rates, one widespread possibility is using the Black-Karasinski model, which is given by the following stochastic process ...
5
votes
2answers
299 views

How to think about pricing this weather call option

So as opposed to the normal structure using a reference temperature and HDD/CDD, I'm looking at pricing a call option with a structure similar to the following: Daily option on maximum daily ...
5
votes
1answer
239 views

Options: Vertical LEAPS

I am developing an algorithm and it needs to know what to do in certain market conditions It takes on a Vertical Bull Call Debit Spread on LEAPS that are 12+ months out in the future. This means that ...
4
votes
7answers
441 views

How is this financial product called?

I have only basic limited knowledge about financial derivatives and I did not find exactly what I was searching for. I found open end turbo call, knock outs, but I am searching for this: Underlying ...
4
votes
2answers
315 views

Is it true that pricing an IR swap doesn't require any stochastic model but calculation of the PFE of an IR swap would?

Pricing an IR swap doesn't require any stochastic model but calculation of the PFE for an IR swap would require the Hull White Model or any other stochastic short rate or forward rate model. Is ...
4
votes
3answers
129 views

Price of an asian option with squared of average payoff

Is there a closed form solution of the following price formula? Assuming $dS_t=rSdt+\sigma S_t dW_t$ under the Q dynamics $e^{-r(T-t)}\mathbb{E}_t^\mathcal{Q}[(\frac{(\int_0^T S_u du)}{T})^2]$ I ...
4
votes
1answer
54 views

Calculating portfolio weights of derivatives

A rather simple question. You have a portfolio of USD100 in cash. You now take USD10 and buy a derivative that gives you exposure of USD200 to something. What is the weighting of cash in the ...
4
votes
1answer
250 views

Obtaining logical lists of Bloomberg security codes in Excel

I am using Bloomberg's BDP and BDH functions in excel to retrieve data for a set of options. The problem is that (as underlying prices move and expiration dates come and go) option strikes are ...
4
votes
3answers
303 views

How to hedge a derivative that pays the reciprocal of the stock price?

1) Suppose S is the stock price, how to hedge a derivative that pays $1/S_t$ at time $t$? 2) Suppose there will be a dividend of amount $d$ between $t$ and $T$, how to hedge a derivative that pays ...
4
votes
1answer
2k views

What is the replicating portfolio of swaptions for a constant maturity swap (CMS)?

How do you replicate the payoff of a constant maturity swap rate? That is, if the payoff of a contract pays the 5-year swap rate every year for 10 years, how would you replicate this payoff using ...
4
votes
2answers
758 views

Is there any gamma in basis (i.e., floating for floating) interest rates swaps?

It is well known that vanilla fixed for floating swaps usually have a bit of gamma, but does a floating for floating (basis) swap have any? For the sake of simplicity, let's assume that both legs of ...
3
votes
1answer
122 views

Question in “Computational Methods in Finance” by Ali Hirsa - Chapter 2: Derivatives Pricing via Transform Techniques"

Reference: "Computational Methods in Finance" by Ali Hirsa - Chapter 2: Derivatives Pricing via Transform Techniques" - Page 37* Background: The author prices call option using the Fourier Transform. ...
3
votes
2answers
703 views

What is a standard credit default swap contract and where can I find spread data? What alternatives exist to judge creditworthiness?

I'm doing some work for a company and one of my tasks is to research credit default swaps on banks and to write a page about them explaining what they are and how they're used to evaluate the banks' ...
3
votes
1answer
34 views

Fees on derivatives

Since it's obviously not at their fair value that derivatives are priced, how do investment banks compute the fees that they add on top of the risk neutral price ?
3
votes
3answers
365 views

Basic question about Black Scholes derivation

In the derivation of the Black Scholes equation, the value of the portfolio at time $t$ is given by $$P_t = -D_t + \frac{{\partial D_t}}{{\partial S_t}}S_t $$ where $P_t$ is the value of the ...
3
votes
1answer
78 views

Information on Weather Derivatives

I am looking for relevant information on the organization of the Weather Derivatives market. How is it organized? How information is shared? Where can we find historical database? I am aware of the ...
3
votes
1answer
164 views

meaning of discount term in FRA value

Consider a forward rate agreement on LIBOR (say), which starts 2 months from now, expires after 3 months and has strike $K$, and is based on $3M$ LIBOR -- $FRA_{2\times 5}$. Now the present value of ...
3
votes
1answer
385 views

How did bans on short-selling affect the derivatives markets?

Due to the ongoing turmoil in the financial markets a short-selling ban is being considered (again, one has to say, but this time in Europe): ...
3
votes
1answer
59 views

Using Market Gamma to Predict FX Trading Environments

I want to test a hypothesis about using gamma to predict FX movements. Suppose that market makers will seek to be delta neutral given their portfolio of FX options. At any given time, market makers ...
3
votes
1answer
41 views

Equivalency of FX forwards and FX fixed for fixed swaps? Are they still the same under multiple curves environment?

I am encountering two approaches for valuation of FX swaps (fixed for fixed, e.g. fixed USD payments for fixed EUR payments) which seem to result into different values although in theory they should ...
3
votes
0answers
71 views

why many option contract price less than minimum boundary price?

I downloaded data from NSE(National Stock Exchange) website regarding closing price of European Call Option written on Index. From standard textbook, I read that option contract must satisfy $C(t) ...
3
votes
0answers
278 views

Bloomberg scripting language (BLAN)

Did anyone work with Bloomberg scripting language (BLAN is the name I guess). If so is it really flexible and is it competitive with other valuation services (say Super Derivatives). Does it enable ...
2
votes
6answers
339 views

What is the Benefit of holding a short option?

i am new to corporate finance and ask myself why a investor is interested in being short on a Option? The only he can win is a premium but he can loose much more. I understand with being a short I can ...
2
votes
4answers
189 views

Are there any derivatives which pay amount $a(p-b)^{2}-c$ where $p$ is the price of underling asset?

Are there any derivatives which pay amount $a(p-b)^{2}-c$ where $p$ is the price of underling asset ? (or in the case of options $max(0,a(p-b)^{2}-c)$) I'm not very strict here but I only want to know ...
2
votes
2answers
685 views

Curve Euribor - Euribor 3M

I'm setting up some Euribor 6M and Euribor 3M curves. So far i have all the data and quotes i need, but i'm having trouble defining the firsts points of the curve. I'm currently using 6M Euribor and ...
2
votes
3answers
115 views

How are referenced asset gains routed in a credit derivative?

Lets assume for the sake of the example that we are talking about a Total Return Swap. The flow diagram is something like this. Lets assume the Payer in this instance is a Hedge Fund, and the ...
2
votes
2answers
140 views

When can a derivative be considered to be path dependant?

The typical example of path dependant derivatives are knock-ins and knock-outs. At the same time vanilla American options can also be considered to be highly path dependant. Does a more or less ...
2
votes
1answer
477 views

How to measure contango?

Is there any unit of measure for the magnitude of the contango (or backwardation) for futures, so you can compare the contango of many symbols.
2
votes
3answers
5k views

How to hedge the fixed leg of a swap contract?

I happened to get this question for Fixed Income Swap contract. (let's assume it's it's not cross currency). If the fixed leg is paying 10% interest rate in this contract, but in the market the ...
2
votes
2answers
199 views

Pricing forward contract on a stock

Please tell me where I've gone wrong (if I did in fact make a mistake). I'm pricing a long forward on a stock. The usual setup applies: This has payoff $S(T) - K$ at time $T$. We are at $t$ now. ...