# Tagged Questions

Questions about models for the valuation of option contracts.

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### Can someone explain to me what's snell envelope?

What is snell intuitively? And what is its use in quantitative finance? Please explain to me as intuitive as possible! As I explained in the comments, I am new to this field and I was hoping someone ...
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### When to include dividends in option valuation

When using the Black-Scholes-Merton method for option valuation which takes into account dividends, does the dividend only get included into the calculation of options whose lifetime straddles the ...
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### Does the fact that volatility is not constant imply existence of skew?

I had a question regarding the existence of the volatility skew. I've tried researching it a fair bit and I come across a few different explanations: 1. Market participants like buying downside puts ...
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### Use of Black-Scholes Model on Guaranteed Fund Investment

I am stuck with a revision question at home on Black-Scholes pricing model. The question is on a fund manager selling one unit of the fund to a customer for $S(0)$ at time $0$ and then guaranteeing ...
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### Is the price of European put option monotone in volatility if we replace BM in Black-Scholes with a general Levy process?

Under the Black-Scholes model, we have the European put option is $\mathbb{E} [e^{-rt}(K-S_t)]$, where we take $\log(S_t)=X_t$ and $dX_t= \sigma dW_t - \dfrac{1}{2}\sigma^2 dt + rdt$. Here the option ...
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Here is a problem in Hull's book and the given solution: My approach was to compute the profit $\pi = \pi_{SP} + \pi_{LC}$ (short put, long call). One can show that $\pi = \pi_{SP} + \pi_{LC} = ... 1answer 104 views ### How to price touch options using quantlib? I am new to quantlib and I want use it to to price a touch option (single/double). I searched on google for example code but I could not find anything. Hence, I am ... 0answers 44 views ### Price a Fixed Strike Lookback Call Option I'm having an issue working out the following: Consider a three-period asset price model with interest rate 1+r =6/5 in each period. The initial price of the asset is 4 dollars, while in each period ... 0answers 48 views ### Does the Binomial Pricing Model require a no-arbitrage assumption? In a binomial option model, if we take the uptick as 6%, downtick as 5% (assume equally probable), and RFR of 6% (continuous compounding), then we have a violation of$0 < d < 1 + r < u$. ... 2answers 321 views ### Vega hedging with implied volatility smile I have a problem with vega hedging. Consider the management of an exotic derivative, such as Barrier option. Typically we do the following tasks: selecting a pricing model, say, a local volatility ... 0answers 46 views ### How to find the fx lookback floating/fixed strike options prices? Currently, I'm working on my thesis in which I'm trying to describe how are the FX lookback options priced. I need to find the real ... 1answer 55 views ### Applying interest rate models for volaility rate To what extent may the interest rate models be applied for modeling implied volatity? The story: I was checking different stochastic option pricing models for being able to replicate implied ... 3answers 210 views ### Can I get Black-Scholes option price from greeks? I am unpleased with current Interactive Brokers risk graph for option strategies, so I'm planning on writing an application myself to plot it. My initial idea is to get the option greek values from ... 2answers 277 views ### Why do we need$dS_t=r S_tdt+\sigma S_tdW_t^Q$? Suppose$S_t$is the stock price and follows the dynamics $$dS_t=\mu S_tdt+\sigma S_tdW_t$$. According to Girsanov, we can apply change of measure and obtain$dS_t=r S_tdt+\sigma S_tdW_t^Q$, this ... 1answer 50 views ### How do I incorporate dividends into options pricing -Hey all, recently I encountered the necessity to incorporate dividends into options pricing. Lets say I have the following american put option: Initial price - 100, T-0.25, Volatility is 30%, Number ... 0answers 205 views ### Max option leverage strike Since options represent leveraged stock investments, at which strike$K$does a European option provide maximum leverage? Hereby define leverage$L$as ratio of Delta/Optionprice: $$L(K)=\frac{\... 1answer 92 views ### Derivation of Magrabe formula I'm going through the following note by Davis, link. In chapter 3 he derives the Magrabe formula. I got stuck at equation (3.16). We have two assets:$$dS_i(t)... 1answer 80 views ### What is more likely effect to call and put prices, respectively, if the stock price decreases by$1?

The current stock price is \$80.Call ,and ,put, options, with ,exercise ,prices, of$50 and 3 days to maturity are currently trading. What is more likely effect to call and put prices, respectively, ...
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### Pricing claims of parties in a fund

I'm working on the following problem and would appreciate some input because I'm stuck. Consider a fund that works as follows. The fund starts with $S_0$ worth of assets following a geometric ...
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### Analytical soluton to the Black-Scholes equation with a modified European Call Option

Please consider the following modified European Call Option where $0 < a \leq 1$. When $a = 1$ the modified European call option is reduced to the standard European call option. ...
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### Which option pricing models agree best with the market, given the asset price is known?

Assuming you can somewhat forecast the underling asset price movement, and you want to translate this value into the corresponding option price. In practice, which are the better models for this task? ...
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### 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 ...
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### Exercise 2.2 from the book “The concept and practice of Mathematical Finance”

I am a newbie. Please help me understand how to resolve the exercise 2.2 from the book "The concept and practice of Mathematical Finance". The solution from the book says that our super-replicating ...
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### Why Drifts are not in the Black Scholes Formula

This question has puzzled me for a while. We all know geometric brownian motions have drifts $\mu$: $dS / S = \mu dt + \sigma dW$ and different stocks have different drifts of $\mu$. Why would ...
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### How can the time value portion of an option be higher than 100%?

Here's a screenshot from InteractiveBrokers TWS for the near-the-money put and call on the ES Dec '15 Future: The absolute value of the time value, 9.50, makes sense. But why is the percentage ...