6
votes
3answers
293 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
138 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 ...
7
votes
1answer
329 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
318 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 ...
5
votes
1answer
179 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
1k 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 ...