Questions about models for the valuation of option contracts.

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1answer
114 views

Symmetry of option-implied probability density

I was wondering whether the option implied probability density of the log returns: $x = \ln\left(\frac{S}{S_0}\right)$ with S the value of a certain stock, is always symmetric ? I was asking myself ...
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172 views

Numerical difficulties in fitting option prices

In [1], the authors state that "Although some studies apply the curve-fitting method directly to option prices, the severely nonlinear relationship between option price and strike price often leads to ...
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1answer
377 views

Question on OptionMetrics: “Strike Price times 1000” differs too much from Index price

I have a question regarding the strike price that is given on OptionMetrics. My goal is to primarily retrieve options prices of a specific maturity with strike prices that are 20% in-the-money, ...
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1answer
27 views

Binomial tree vs trinomial tree in pricing options

Very new to pricing models. Is there a general guideline when to use binomial tree and when trinomial tree is preferred? As far as I know, unlike binomial tree, trinomial tree only gives a range ...
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34 views

Short-term spot futures pricing model [on hold]

I am looking for price model for spot and futures Maybe you can recommend something intresting? Price can include (time until expiration) and volatility in spot,price of spot What i should looking ...
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2answers
74 views

Annual dividend yield using option prices

If I have only strike, call and put prices for European options, how do I work towards computing the continuous dividend yield?
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25 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 ...
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18 views

Price a put option on a CPPI

I want to price a put option on a CPPI using Monte Carlo. I have found so far this article which prices a call on a CPPI. I was wondering if I could use the put/call parity here, and and if so, how ...
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6 views

Will a back month leg in call calendar lose value if underlying goes down

If I buy a call calendar and underlying drops 5%, the front month short call will get further out of money and will lose value, resulting in a gain since I am short the front month option. What about ...
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48 views

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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22 views

Why does the OTM call sometimes have a higher theta than the ATM call?

In this AAPL option chain on Mar20 call options, the OTM calls have a slightly higher theta than the ATM calls. Why is this? Is not time value(and thereby time decay) supposed to be highest for ...
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11 views

Will implied volatilities rise by same amount across time and across strikes in lieu of an earnings report or a news event

It is said that implied volatility of an option rises leading up to an earnings report or a pending news event like FDA trial, a possible takeover,elections(?) etc. My question is, implied volatility ...
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20 views

Complicated American style option contract with numerous non-standard features (simultanous exercise, additional premium, etc.)

I want to value the following contract for times $0<t<T$, i.e. determine $V(t,\cdot)$ where $\cdot$ refers to all other dependences (strike, spot, volatility, etc.). The contract is long and ...
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44 views

How to value an expansion option?

Fair warning this is help with homework. I am not asking for an answer but some guidance or a formula would be nice. I have absolutely no background in finance and this class is online with no ...
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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 ...
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27 views

How to calculate intraday implied vol on the last day of trading an OTM option

i've been trading globex options on US Treasury futures, but my option calculator only takes the date as the time input..so on the last trading day, the model assumes all values are errors because the ...
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53 views

Pricing defaultable binary option with hazard rate approach

I'm studying defaultable claims and asked myself how to price a digital payoff. Consider an option paying $1$ at maturity in case of non-default before maturity and if a given underlying process $S$ ...
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0answers
26 views

Real-World Cash Account Implementation and Return

Often in financial math, the concept of the risk-free cash account, with return R, is invoked as an instrument for calculating prices - when constructing an option-replicating portfolio, for example. ...
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53 views

Is it possible to graph the option price with respect to the greeks

Is it possible to graph a European option's price as a function of say, its delta? I've been wondering this since, for example, for a call, the option price is given by $$Se^{-q*t}\Phi (d_1) - ...
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30 views

Price of portfolio with target volatility

Consider the following: We have two assets, S1 and S2, and with each asset is associated a volatility, v1 and v2, respectively. Now let's say v1 < v2, and we want to create a portfolio of S2 and ...
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48 views

Credit Spread - pricing Option and Fixed Income

hi how do you handle credit spread 1. For Option with Equity underlying 2. For Fixed Income/Bond I understand there're two options: a. Expected Loss from Probability of Default & Recovery Rate ...
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0answers
86 views

America option early exercice boundary via Monte Carlo simulation

I am trying to calculate an american option price via the simulation of the early exercise boundary using the method presented in this document: Monte Carlo Method For pricing a put Option. I have ...
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1answer
81 views

Pricing options with two assets

I'm studying for a test and am stuck on this practice question: With interest rates equal to 0, two different stocks $S_1$ and $S_2$, both valued at \$1 today, can be worth \$2 or \$0.50 at some ...
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338 views

R or Matlab code for Multi-Barrier-Options (3 or more underlyings)

I am looking for R or Matlab code examples of multi-barrier-options (or multi-barrier reverse convertibles) with at least 3 underlyings. Do you have such code or can you point me to a place where I ...
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107 views

The basic principle of the construction a portfolio of options

I have a question like this. Assume today's date is 9 January 2016 and XYZ's share price stands at $10. On 8 November 2016 there is a Presidential election and you believe that depending on who is ...
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1answer
210 views

How to construct the binomial model for European option?

The annual interest rate is 5.3% and the annualized volatility of a non-dividend paying stock over the next six months will be 12.5% (annualized). i) Construct binomial trees of 5, 10 and 30 periods ...
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2answers
258 views

Change option B&S pricing

Consider a market composed by two stocks whose prices $X$ and $Y$ are given by B&S diffusion $$dX_t= \mu X_t dt+ \sigma X_tdW_t$$ $$dY_t= \mu Y_t dt+ \sigma Y_tdB_t$$ Supposing the market is ...
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1answer
46 views

Magrabe Exchange Option: not equal drifts

I need to calculate the price of exchange option between 2 assets $S_1$ and $S_2$ The formula is given here Wiki: Magrabe formula or here Quant Stack Exchange. In the derivation of the formula it is ...
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2answers
45 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 ...
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4answers
2k views

True or False? An option's price will always be greater than or equal to its intrinsic value

Since if the option's price is lower than its intrinsic value (eg. strike price - current stock price for puts), then an arbitrage opportunity arises from buying the option at bargain and then ...