A contract that gives the owner the right, but not the obligation, to buy or sell a security at a fixed price in the future.

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116 views

Valuation of Cox-Ross-Rubinstein Model

We have a Cox-Ross-Rubinstein model with parameters $u$ ("up"), $d$ ("down") , $r$ (interest rate) and $q$ (equivalent martingale probability) $(q=(1+r-d)(u-d)^{-1})$ . We have a contingent claim with ...
2
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0answers
109 views

What equation will convert implied yield volatility to implied price volatility?

I am trying to figure out how to turn implied yield volatility of a short-term interest rate into implied price volatility. Is there an equation to do this? I have come across the equation for a ...
3
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0answers
82 views

Pre- Versus post-2008 Crisis Rates Modeling

Modeling for interest rate derivatives (such as bermudan swaptions) is said to have undergone significant changes since the crisis. Prior to the crisis, counterparty default risk was often ignored, ...
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0answers
49 views

What is the main reasons to use Miltersen & Schartz (1998) model for commodity futures options

versus a standard Generalised Black and Scholes model (if there are any?) I have read the paper but I am not to sure about its practical implications as would people with more experience using this ...
2
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2answers
204 views

Why are options called what they are called?

This may be a very obvious question, but can someone tell me where and when the names call and put originated? And similarly, where do the terms American and European option come from? Aside from the ...
2
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3answers
227 views

What noun is used to describe whether an option is call or put?

I'm not sure if this should be asked elsewhere, but it seems like a good place as any. Options have a strike price, they have an underlying instrument, and they have an expiry. They are also either ...
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0answers
81 views

Adjusting for variance bias when using overlapping data

I'm in the process of constructing volatility cones for several assets and I want to make sure the data is free of biases. I know that using overlapping data introduces an artificial degree of ...
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0answers
44 views

How to price an option with a “step up” feature using binomial tree?

I have a call option with expiry in two years. In my case the option is bermudan style with first 9 months w/o ability to exercise (i.e. European) and after exercise at any time (i.e. American), but I ...
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1answer
66 views

Will pricing a Bermudan option default to a value of a European option?

I have a call option with 2 expiry in two years. For the first 9 months I cannot excercise the option. After that the I can exercise at any time. I am pricing this option using a binomial tree using ...
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1answer
158 views

Option pricing within the Black Scholes model

Have a question regarding regular option pricing. In the standard Black-Scholes model, with interest r and volatility $\sigma$. Determine the arbitrage free price at t of an option which at $T>t$ ...
2
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2answers
120 views

When can a derivative be considered to be path dependant?

The typical example of path dependant derivatives are knock-ins and knock-outs. At the same time vanilla American options can also be considered to be highly path dependant. Does a more or less ...
2
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2answers
294 views

Black Scholes vs Binomial Model

I'm trying to confirm my understanding of the 2 models. It is my understanding that the black-scholes is a special case of a binomial model with infinite steps. Does this mean that if I were to start ...
2
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0answers
64 views

At-the-money Call Spread approximation

In a trading manual I got during a course, the value of the ATM Call-Spread is approximated by $CS_{ATM}=\frac{1}{2}StrD+(F-m)\times\Delta CS$ The lecturer skipped the part where he derived this ...
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98 views

What are the theta and vega of a forward starting plain vanilla european option with no dividend?

I am reading through Hull's book asking myself this question to understand exotics. I currently believe that theta should equal 0 until the forward start time, $t_*$, if the call pays no dividends. ...
0
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2answers
100 views

Why long power and short gas for Merchant power plant

Merchant power plant is one that can be turned on whenever you want. Suppose it is generating electricity from natural gas and we have a spark-spread option. Why is that the person who owns plant is ...
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2answers
183 views

Are power contracts traded on any stock market?

Are power contracts traded on any stock markets ? What about OTC markets ? I ask about the derivatives where payoff is some exponential function of difference between strike and spot price.
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1answer
114 views

Price volatility and yield volatility

This question is a bit confused, but please bear with me. Now and then I see people use the terminology "price volatility" and "yield volatility" in connection with bond options. I understand the ...
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0answers
225 views

On the interface between Quant finance and actuarial-science/insurance-math

Actuaries (at least in Europe) are frequently severily lacking in quant finance topics. At best they are familiar with B&S model. People going into quant finane or striving to become a quant on ...
2
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2answers
152 views

Options with a stochastic strike

Do options where the strike itself is a stochastic process exist? If they do - what are the motivations for such a product and where is it used ? Example: Call-Option with stochastic strike: ...
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0answers
147 views

Mock/practice trading for options (delta/gamma hedging etc.)

I know there are some sites for practicing equity investing. But could you provide me with suggestions concerning options trading etc. I read Natenbergs book on Options and want to test things like ...
2
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1answer
98 views

QuantLibXL - Optionlet bootstrapping failure

I am trying to bootstrap the Optionlet volatility surface from a Cap/Floor volatility surface using QuantLibXL. To be specific, the data is from ICAP: ...
2
votes
2answers
386 views

How do I calculate probability distribution of stock prices given option prices?

I'd like to calculate a probability distribution for prices given the option prices for that stock? Any ideas how to do this? My desire is to do this daily and then see how the price PD changes over ...
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1answer
108 views

Volatility tools / web sites?

Could someone give recommendations regarding volatility tools / web sites that they find useful? I am looking for information that my brokerage platform does not provide. Specifically, I want to see ...
2
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1answer
194 views

Call option on a Mutual Fund

I am trying to price a call option on a mutual fund. Given the lack of market implied data, I am going to estimate the fund´s expected volatility using as a reference its historical volatility ...
2
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1answer
147 views

Implied probability density (Question 2 - Applications and Interpretation)

Using the second derivative of the Call-Option-Price one can try to recover the pricing density. Formally: Assuming a constant interst rate $r$ and also not making any assumptions on the model ...
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133 views

Monte Carlo American Option Pricing under GARCH(1,1) volatitliy

I am attempting to price a couple of at-the-money American option using the LSM algorithm and GARCH(1,1) volatility. The LSM code I have works correctly for constant volatility, however, when I switch ...
1
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1answer
197 views

Implied state price density (Question 1 - derivation of the formula)

I came upon the term "implied state price density" in a couple of papers. As far as I understand the concept one basically tries to extract the "pricing density" from the market data. For the sake ...
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0answers
89 views

Zakamouline Optimal Hedging of Options with Transaction Costs

I've read that the Zakamouline method suggests the best optimal hedging of options when taking transaction costs into account. I've read the article but am having difficulty understanding it well ...
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2answers
593 views

Delta Neutral / Gamma Neutral Positions

I've been trying to find out more about options positions which are both delta neutral and gamma neutral--created with some kind of calendar spread. Supposedly, such a trade will be perfectly hedged ...
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1answer
209 views

Pre-trade evaluation and risk assessment of option trading strategies (in market practice)

When a trader gets conclusion of the volatility is being underestimated (via volatility cone or some other technology), actually there are multiple ways for his trading. (Let's assume the underlying ...
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0answers
47 views

Forecasting amount of slippage in executing option spreads

Is there a good quantitative model to estimate how much slippage is required to execute a particular option spread trade? For example, let's say you want to execute an Iron Condor. Given X, Y, Z ...
0
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1answer
393 views

Asset-or-nothing Option Valuation in the Black and Scholes model

In standard Black-Scholes Model, compute the price of an asset-or-nothing put and asset-or-nothing call options. Write down the put-call parity relation between the asset-or-nothing call and put ...
5
votes
2answers
227 views

Algorithmical replication of a profit and loss function using different options

I often see questions like "Given this payoff graph (example below), construct a portfolio that replicates it." I want to know if there is an efficient method/algorithm to find the individual pieces ...
3
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2answers
114 views

Effect of interest rate on options prices

This might be another basic derivatives question. When interest rate rises, stock prices generally fall. Assuming an option's underlying is a stock, this should lower the option's price as well. ...
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1answer
161 views

How to hedge a forward contract

I was asked this in an interview and I messed it up lol. This might actually be really basic. Let's say I signed a forward contract to buy NASDAQ at 4000 one year from now. How can I hedge this cash ...
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0answers
153 views

Does Bakshi, Kapadia and Madan (2003) VIX building approach underestimate volatility?

From a paper that shortly addresses an alternative approach to VIX-like index building: To test this approach, I've built a fake book of B&S options with constant volatility equal to ...
0
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2answers
114 views

Practical equity options pricing

To price a vanilla option, the following information are required : Strike price; Underlying price; Volatility; Maturity; Dividends rate; Repo rate; Interest rate; The strike, underlying price, ...
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2answers
212 views

Risk management of options

Your client would like to buy a digital call option. the digital call option pays the buyer in one years time (i.e at maturity ) N=1m SGD, if the SGD USD spot rate at maturity is above a prescribed ...
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2answers
152 views

Basket Option weight sensitivity calculation

I am looking to find/estimate the "greeks"/option price sensitivities/derivatives for a basket option situation. In specific the change in price of a put option associated with a change in weight of a ...
1
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1answer
151 views

binary tree options pricing model with dividend value - How should I discount the option at?

the expected value of the option given the next period up, down values is: $ Pexp = (p Price_{next, up} + (1 - p) Price_{next, down})/R$ where p is defined as $p = \frac{\exp(-r \times \Delta t) - ...
2
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3answers
168 views

Why are short expiries associated with more pronounced volatility skews?

I've noticed that for a given strike price, the shorter expiration dates of options have more pronounced volatilities why is that?
2
votes
1answer
257 views

How to replicate this option?

I have a question I am not sure how to approach: Suppose interest rates is 50%, a stock worth \$1 today can be worth \$2, \$1, \$0.5 next year. If the option that pays \$1 only when S = \$2 is ...
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3answers
216 views

Is it wrong to use 'real world' probabilities for option valuation?

Is it wrong to use 'real world' probabilities for option valuation, even when the market is not liquid enough to delta hedge the option? My instinct is that it is wrong, because the time value of ...
2
votes
2answers
155 views

Lower bound of ITM Calls when computing Implied Volatility

Assuming the Black Scholes model and pricing formula of a European call option. Then, if the call is ITM, i.e. if $ln(\frac{S}{K})>0$, the $d_1$-term will go towards infinity as $\sigma$ goes to ...
3
votes
3answers
317 views

Papers and algorithms on bidding schemes for best order execution?

I'm building an automated option trading bot that executes common options multi-leg strategies (straddles, spreads) and I want to learn the best way to execute my orders. As you know, the bid-ask ...
3
votes
1answer
253 views

what's the relationship between forecasted stock volatility and implied volatility?(option)

what's the relationship between forecasted stock volatility and implied volatility? I know that implied volatility is the volatility calculated by BS formula, is there any relationship between implied ...
1
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1answer
121 views

probablity expiring in the money ..basic question

Everyone says $N(d_2)$ is the probability of the option being exercised but stocks that have really high volatility have really expensive options indicating a high likelihood of expiring in the money. ...
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2answers
310 views

fair price for a call option

I am struggling with the following problem: An investor is considering a European call option, whose price $C_0$ is yet to be determined, on the shares of a company called XYZ. You know that : the ...
2
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2answers
153 views

Time-zero price of two specific contingent claims

I am unsure how to start with the following problem. I have two contingent claims where contingent claim (1) pays $\int_0^T S_u du$ and contingent claim (2) pays $(\log S_T)^2$ at time $T$ Now I ...
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1answer
129 views

Lattice Boltzmann method for pricing options

I'm looking into whether there is ANY information out there regarding the implementation of the Lattice Boltzmann method for pricing options (or other financial tasks). I am very new to the world of ...