# Tagged Questions

Questions about models for the valuation of option contracts.

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77 views

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### How to find the upper bound of a digital option given some market data?

Given the price of a call equals to 5 with Strike 100, please find the upper bound (sup) of the digital option with strike 105. I am not sure about the solution, but I write the condition like this, ...
0answers
216 views

### Tian third moment-matching tree with smoothing - implementation

I was wondering if someone has an implementation of the Tian third moment-matching tree (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1030143) with smoothing in code (e.g. c++, vba, c#, etc.)? ...
1answer
162 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
2answers
228 views

### Pricing options under a specific framework

I have a specific framework in mind and I would like to value options under this framework. I am not sure whether a closed form solution exists or Monte Carlo methods would work. The framework I have ...
3answers
965 views

### How can put options be more expensive than call options in an efficient market?

I noticed that for some securities, puts were more expensive than calls (with same expiration). For example, suppose the underlying security is trading at 50. A put with a strike of 45 is more ...
2answers
376 views

### how to calculate more efficient volatility figure than historical volatility?

can we use alpha value to calculate option price instead of historical volatility. And if we can please explain how. I am doing my MMS in Finance and this for a project i am doing. the project is ...
2answers
311 views

### Option arbitrage with dividends?

If a stock pays a discrete dividend, the stock price falls by the amount of the dividend. There is no arbitrage opportunity from this predictable jump, because the investors receive the same amount of ...
4answers
188 views

### analytic formula for the value of an American put option

It seems to be a foolish question but I can't take my mind off from , Is it true that there is no analytic formula for the value of an American put option on a non-dividend-paying stock (or a divident ...
2answers
484 views

### Estimate simple option price without a calculator

I have been to two different interviews for jobs related to option trading, and both time I have been asked a question, which is pretty basic, and still I could not answer it. If you have an European ...
1answer
211 views

### Local volatility pricer

I am testing a local volatility pricer by comparing its results under two settings: Pricing a 5yr ATM call option with a flat volatility of $0.194$ Pricing the call option with the typically shaped ...
2answers
2k views

### Calculate volatility from call option price

Given call option price, what is the simplest formula to get the volatility value ? Test Data: ...
1answer
698 views

### How to explain the path dependency in binomial tree model to price options?

I'm new to quantitative finance, so I'm confused with the so-called path dependency in binomial tree model. Originally I thought the path dependency exists because in binomial tree model, we will ...
1answer
870 views

### Which prediction market model is efficient and simple to use?

For a college project I'm tasked with implementing prediction market. Which model of it I'd better choose? I want something useful and simple enough for other people to quickly understand and use. (...
2answers
81 views

### How is the fundamental theorem of asset pricing used?

I know that a multi-period market model is complete and arbitrage free if there's a unique equivalent martingale measure. The thing is, I have absolutely no clue how to apply this theorem to a simple ...
2answers
80 views

### Counting random paths

Assume the path of a certain stock can be modeled using a binomial tree. The initial price of the stock at time $t=0$ is 1024. The upstage factor of the stock price is $x=1.25$ and downstage factor of ...
1answer
58 views

### A clarification on the Heston option pricing formula

I have carefully reconstructed all the computations that lead to the Heston option pricing formula for a call. I end up with this formula for the "adjusted" probabilities  P_j\left(x,v,T;\ln K\...
1answer
86 views

### Black Scholes Geometric Brownian Motion Option Pricing

I'm doing a past paper for one of my masters modules and I'm stuck on this and I have no idea how to tackle such a thing. It's worth 30% of the exam so would be great if anyone here has any ...
2answers
105 views

### Is Trading in the Underlying Necessary for Replication?

In a simple one-period binomial model we have two possible payoffs: $f(S^u)$ and $f(S^d)$. To replicate this we must trade in two assets, usually the stock $S$ and the money market account (assumed ...
1answer
114 views

### Pricing call option

Question: The price of a stock is 100. With equal probabilities, it either goes up to 130 or down to 70. What is the price of a 1 year call option with exercise price 100. Risk free rate is 5%. ...
2answers
163 views

### Intuitive Reasoning for Using Risk-Neutral Measure

Although we thoroughly covered risk-neutral pricing in university I never fully understood it in the context of continuous-time processes. But first of all, lets consider a discrete time example: ...
1answer
209 views

### Implied volatility and pricing of vanilla options

As far as I understood, implied volatility (IV) is a lucky parametrization of the vanilla option's price. That is, instead of deciding how much the call worth now, you can decide on its IV and put ...