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2answers
1k views

What is the Most Efficient Way to Calculate the Internal Rate of Return IRR?

I have built a program that prices financial assets and it does this in part by calculating the IRR. The problem is that it does not run as quickly as I would like it to. I currently use the Newton-...
2
votes
1answer
195 views

Risk-neutral models for rights issues

A rights issue is the granting by a corporation to its shareholders of a right to purchase $N$ new shares for each $M$ shares they already hold at a (often discounted) price $K$. Thus, it ...
2
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0answers
31 views

Equity protection and butterfly certificates pricing

Certificates issued by famous industry names are usually made up by a combination of a fixed income instrument and some vanilla and exotic options. I am looking for something which explains: how to ...
2
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0answers
96 views

How to calibrate volatility surface for Interest Rate Cap&Floor pricing

I'm using Black model to do interest rate Cap & Floor pricing. The volatility is determined by using the bootstrapping methodology. However, afterwards, how should I do the calibration, or ...
2
votes
1answer
70 views

What is the filtration described?

What is the filtration $(\mathfrak{F}_t)$ encircled below? Is it $(\mathfrak{F}_t) = (\sigma(W_t)) = (\sigma(\tilde{W_t})), t \in [0,T]$? Or is it $(\mathfrak{F}_t) = (\sigma(\hat{W_t})), t \in [0,T]...
2
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1answer
880 views

Pricing an interest rate swap using Eurodollar futures

I see this posted but no answer given. I think it would be a good idea if we have a question on here to illustrate an example of how to price an interest rate swap. So far, I understand that that for ...
2
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0answers
296 views

How to price zero coupon bonds with the Monte Carlo method?

Im trying to calculate monthly ZCB bond prices with a fixed maturity T, over a period of months via Monte Carlo methods. Here is my attempt: For the first month, the price is $P_{t_0}(0,T) = E[exp(-...
2
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0answers
81 views

The concept of an incomplete market

While skeeming the relevant literature and web-sites I noticed that mostly the concept of the incomplete market is reduced to the following statement "A market is incomplete if there are more ...
2
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0answers
99 views

How will the European requirements for prudent valuation affect derivatives pricing?

The European Banking authority has published the "EBA consults on draft technical standards on prudent valuation". How will these requirements for prudent valuation affect derivatives pricing, if at ...
2
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0answers
83 views

Changes to option valuation for dollar-pegged underlying

In Russia, options on futures on the RTS index are priced in points instead of currency, with points being directly related to the value of the US dollar such that, for example, if the dollar rises, ...
2
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0answers
191 views

Stochastic discount factor (aka deflator or pricing kernel) and class D processes

When (under what assumptions on the model) does a Stochastic Discount Factor need to be of Class D? What would be the implications if it was not? Is it connected to one of the no-arbitrage notions?
1
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1answer
379 views

Pricing swaptions

What are the approaches available to price a swaption (either European or American style)? So far it seems Black method is the only one used. Thanks!
1
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1answer
61 views

What causes discontinuities with stock prices

With reference to the figure above, why is it that the price at which the stock closed at on monday not equal to the open price on tuesday? Is this discontinuity due to an adjustment in the price to ...
1
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2answers
285 views

Why QuantLib computes the fixed-leg swap rate by this formula?

I'm trying to understand how QuantLib creates (bootstraps) a yield curve from a vanilla swap at the source level. I have the following test code: ...
1
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2answers
175 views

Clean EOD global Equities data provider for backtesting investment strategies

I'm trying to find a good source for global equities for EOD data (historical and forward basis), currently using Bloomberg's back office data, but it is very hard to normalize it for corporate ...
1
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2answers
77 views

zero coupon problem calculus

I encounter a problem: do we have the following equality : $B(0,T_{i})e^{\int_{0}^{t}r_{s}ds}=B(t,T_{i})$ and if yes why because I am stuck with this ... I try to use that : $B(t,T_{i}) = B(0,T_{i})e^...
1
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2answers
384 views

How to price this option using the Black Scholes model?

I have a question regarding regular option pricing. In the standard Black-Scholes model, with interest r and volatility $\sigma$, I have to eetermine the arbitrage free price at time $t$ of an ...
1
vote
1answer
99 views

Simple pricing example confusion

This it taken from "Heard on the Street", Section B. Consider a market with $0$ risk-free rate, no transactions costs etc. The IBM stock costs \$75 and does not pay dividends. Design a security ...
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2answers
514 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 ...
1
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2answers
193 views

Non-Negativity of up-factor and down-factor in Binomial No-Arbitrage Pricing Model

Consider a stock which is trading at $S_0$ at time $t=0$ and is expected to be trading at price $uS_0$ or $dS_0$ at time t=1 where $u$ and $d$ are up-factor and down-factor. The theory says that to ...
1
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1answer
246 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 ...
1
vote
1answer
433 views

Bond futures - calendar spread pricing

I am looking on literature and models on pricing a bond futures' calendar spread. assuming the basket of deliverable bonds is the same and the ctd is the same, what are the factores determining the ...
1
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1answer
505 views

Calculate historical (ATM) option prices with public data

I just saw the question How to calculate the most realistic historical option prices with additional publicly available parameters and I am interested in the step before that. How can I calculate ...
1
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1answer
54 views

Why does the correlation between r and V in Longstaff and Schwartz 1992 model is positive?

I am reading the Longstaff and Schwartz's 1992 and 1993. From $r = \alpha x + \beta y$ and $V = \alpha^2 x + \beta^2 y$. It was mentioned in the paper that the $r$ is positive correlated with $V$. ...
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0answers
32 views

Estimation of Affine Term Structure Model

In this paper the estimation of Affine Term Structure models via ML is discussed. In the Affine $N$-factors model the price of the bond is $$ P(X_t,t,T;\theta) = \exp(-\gamma_0(T-t;\theta)-\gamma(T-...
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0answers
22 views

Methodologies behind shocking a composite index instrument, what assumption distinguishes these?

Suppose I have a composite index (rebalancing or non-rebalancing) that at present time has some base value $B_{\text{base}}$ in some base economy. I am in the process of shocking the economy on which ...
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0answers
23 views

Issue on pricing bond using RQuantLib

trying to pricing a simple bond using RQuantLib, but cannot get the right values. For example, consider a bond with 2% annual coupon rate and flat interest rate of 3%, a 5 year maturity, and \$100 ...
1
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1answer
44 views

General Equation for price optimisation where cost is constant

I'm currently working on the Quantitative Finance course offered on Coursera by Wharton and in one example it states that "through calculus, one can obtain the optimal value of price when p(opt)=(c*b)/...
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0answers
104 views

Turnbull & Wakeman Asian - not Edgeworth?

My understanding is that Turnbull & Wakeman derived an approximation formula for continous arithmetic Asian option using Edgeworth series by matching the first two moments. However, in the book ...
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0answers
21 views

Methods Available for Derivative Pricing in Mathematica? [closed]

I am using Mathematica to price options (built in functions, no need to reinvent the wheel, right?). In the documentation, the Binomial method is used as an example of specifying a non-standard method....
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0answers
26 views

Why is the forward price set to make the value of the forward contract to 0 when it is signed? [closed]

When I study the forward contract, I read that the forward price must be the price that makes the the value of the contract zero. I searched for the answer, but there are many versions. Some say it ...
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0answers
41 views

Is there anyone tried to use simultaneous stochastic differential equations?

I am looking for some examples or attempts of using simultaneous stochastic differential equations for financial analysis but there has been none so far. Is it just so nasty to apply such thing in ...
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0answers
138 views

PDE vs TREE vs MC vs Analytical

One what basis the pricing model can be differentiated for particular trade pricing. For exapmle why PDE or Binomial tree or MC or Analytical method will be consider for pricing any trade. Question ...
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0answers
105 views

Black Scholes Model Replicating Strategy Delta Hedged Exam Question

A share is currently priced at 640p. A writer of 100,000 units of a one year European put option with an exercise price of 630p has delta-hedged the option with a portfolio which holds cash and is ...
1
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1answer
49 views

Differential equation involving bond price and forward rate

Given forward rate f(t,T) and bond price P(t,T) where $f(t,T) = - \frac{\partial}{\partial T} \ln P(t,T)$, $P(T,T) = 1 = P(t,t)$, T>0 and $t \in [0,T]$ Does it follow that $P(t,T) = exp(-\int_{t}^...
1
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0answers
31 views

Total demand under logit model

The setting is simple, i.e. formula for demand of service/product is linear $$ d = \alpha - \beta p $$ where $ \alpha $ is maximum demand, $ \beta $ is some coefficient, and $ p $ is price. There ...
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0answers
805 views

Exporting Time Series Data For Securities Prices From Bloomberg to Excel

I have a list of securities over a thousand entries long that I want to construct a time series of prices for over a specified historical period (e.g. 2/01/10-2/20/10). Doing this manually would take ...
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0answers
62 views

Incorporating a stochastic correlation structure into a multi-factor model

I am considering extending a multi-factor fixed income stochastic model (e.g. LIBOR-Market) to use stochastic correlation matrices instead of determinstic ones. For pricing instruments with short ...
0
votes
1answer
224 views

Price difference between bond cash and futures

I used to trade German and US govt. bond futures and I am now having trouble understanding the price difference of these markets against the cash market. For example, the 10 year german government ...
0
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3answers
98 views

Why is it enough to know the expected present value of cash flow in risk-neutral framework to price derivatives?

Wilmott book states that its enough to know the expected present value of all cash flow in risk-neutral framework to price derivatives. As I know, to obtain arbitrage-free market we need our ...
0
votes
1answer
78 views

Does presence of arbitrage necessarily make all derivatives have zero value?

Spin-off from: Pricing when arbitrage is possible through Negative Probabilities or something else I mean in a theoretical sense: If we have a particular market model with some fancy assumptions such ...
0
votes
2answers
330 views

Why does the price of a convertible bond go up if the CDS spread goes up?

Looking at convertible bond prices in a commercial pricing tool, which is based on a model of Black-Scholes volatility plus a Poisson process of jump to default, I noticed that increasing the spread ...
0
votes
1answer
76 views

Do FRN's *always* trade on par on reset days, regardless if the issuer's credit quality has changed?

I keep reading that floating rate notes trade on par on coupon reset days. Is this always true, regardless of changes in the issuer's credit quality since the FRN was issued? It seems probably ...
0
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1answer
42 views

Is there any research for CoCo-Bond in a two factor model?

Basically I am trying to price CoCo-Bond with the AT1P from Brigo. But in the end this isnĀ“t a two factor model. Is there any concret research about this topic? Kind regards, WLS
0
votes
1answer
64 views

Finding circumstances for price of call = price of put

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} = ...
0
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1answer
518 views

What constitutes an “odd lot” in corporate bonds trades?

This is important in price discovery and pricing of bonds based on trades. "Odd" lots are traded at lower prices than "round" lots. However I wasn't able to find a definition of "odd" lot anywhere. ...
0
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1answer
163 views

Implication of the Greeks under jump diffusion model

Consider jump diffusion model proposed by Merton and Kou. As far as i know, most paper only dealt the valuation of option under the jump diffusion model. As i expected, because of the ...
0
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1answer
71 views

Liquidity and Prices

Do fewer transaction costs and higher liquidity relate to lower market prices? Are there any good resources that deal with these topics in more detail?
0
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2answers
448 views

Matlab; How to specify Coupon frequency for Interest Rate Swap

I'm trying to price an interest rate swap and would like to change the default coupon payment frequency from 1 a year to 2 or 4 a year. I'm using ...
0
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2answers
36 views

Pricing of Interest rate swap with start ex. 01/06/2015 to 03/06/2015 - 2 extra days? Change discount factor and fixed payments?

I hope you can help me. So let say we have an interest rate swap, with the following characteristic: Start in 30/06/2015. End in 02/07/2019 It has fixed payment every year, and floating every ...