Questions about models for the valuation of option contracts.

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6
votes
4answers
554 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 ...
2
votes
2answers
98 views

Time-independent local volatility

Suppose somebody provides us with a surface of European call prices $C(\tau,K)$ where $\tau$ stands for time-to-maturity and $K$ for the strike. By Dupire's results, there is a unique local volatility ...
1
vote
2answers
80 views

Stock Returns Distribution in Heston Model

There is a paper by Dragulescu and Yakovenko (DY) in 2002 proposing a pdf for the stock returns in the Heston model. However, in a paper by Daniel, Bree and Joseph, they actually perform statistical ...
-2
votes
2answers
43 views

Option greeks: sensitivity to 1% move

In a Black&Scholes framework how can I compute the following sensitivities: to 1% move in the underlying price to 1% move in implied volatility I would like the greeks to tell me how many ...
4
votes
1answer
99 views

How to price a futures spread option?

Let's say I have two futures contract $F_1(0,T)$ and $F_2(0,T)$ on two different correlated underlyings. If I assume that both underlying follow a GBM with volatility $\sigma_1$ and $\sigma_2$ ...
2
votes
1answer
134 views

american option and cash dividends

Can someoe help with this : What is the precise arbitrage argument demonstrating that the price of an american option should be continuous around an ex-dividend date? Thanks
1
vote
1answer
28 views

Time value of option not always leading to an increased option value

My understanding was that as you increase the time to expiry of an option, the value of the option increases. However, I have run a bunch of scenarios and have realized that if you assume a dividend ...
1
vote
1answer
18 views

Time 0 value of an American Put in Cox-Ross-Rubinstein model

This is a question from a problem sheet which I have handed in and have solutions for. The only examples of this in class I have seen are examples where the interest rate is 0. "Consider a ...
0
votes
1answer
21 views

Invoice Discount pricing model

I was wondering whether there exist pricing models in particular for Invoice Discounting contracts and short-term financing solution where credit risk plays a major role. Specifically, assuming that ...
0
votes
1answer
130 views

FX Delta Conventions

I'm currently reading Iain Clark's book Foreign Exchange Option Pricing and I got stuck at one sentence in the beginning of Section 3.3 that I feel is important to understand. He writes: FX ...