Tagged Questions
5
votes
1answer
152 views
How to derive the formula of a European Libor call option in a Libor Market Model?
I am struggling with the following two mathematical statements. The first is from the book "Term-structure Models: A Graduate Course - Damir Filipović" Suppose we have a deterministic function ...
5
votes
0answers
103 views
Replicating portfolio and risk-neutral pricing for interest rate options
For equity options, the pricing of options depends on the existence of a replicating portfolio, so you can price the option as the constituents of that replicating portfolio. However, I am not seeing ...
6
votes
1answer
129 views
Should we apply practical constraints on the distribution of monte carlo paths?
to limit interest rate paths to a 'reasonable' range (if we could define reasonable). Now we calibrate log-normal skew and mean reversion monthly to robust basket of atm swaptions and in and out ...
6
votes
1answer
245 views
How to reduce variance in a Cox-Ingersoll-Ross Monte Carlo simulation?
I am working out a numerical integral for option pricing in which I'm simulating an interest rate process using a Cox-Ingersoll-Ross process. Each step in my Monte Carlo generated path is a ...
5
votes
1answer
218 views
How to value a floor when a loan is callable?
Certain bank loans pay a spread above a floating-rate interest rate (typically LIBOR) subject to a floor. I would like to find the value of this floor to the investor. Assume for this example that ...
4
votes
1answer
156 views
How to scale option pricing components in regard to time
I am looking at closed-form options approximations, in particular the Bjerksund-Stensland model.
I have run into a very basic question. How should I scale the input variables in regard to time? My ...
7
votes
2answers
975 views
Which risk-free rate to use to price a bond issued in one currency but convertible into equity in another?
A convertible bond denominated in USD is issued by an Indian company (with equity traded in INR). The bond will be repaid in USD and if converted into equity in the company, the conversion price will ...
