# Tagged Questions

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### Mix of Arithmetic and Geometric Brownian Motion

Talking with some traders the other day, I found out that they were using a pricing model based on a mix between a geometric brownian motion and an arithmetic brownian motion to price certain ...
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### 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 ...
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### 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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### what's the difference between Peak-Load pricing and price discrimination?

i just don't get it. Peak-load pricing wiki page gives example: in public goods such as public urban transportation, where day demand (peak period) is usually much higher than night demand (off-...
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### How does financial institutions value European options in practice?

I am a little bit confused, or uninformed more truthfully, regarding how option pricing (Europeans only in this case) are handled in real life. Up to now I have acquired some theoretical knowledge of ...
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### Normalization of Market Data in Time Series Correlation

Suppose we have 2 time series of market data, one for each security and we want to correlate between these 2 securities. My question is How do we handle gaps of missing data in the time series? ...
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### 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
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### 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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### Fees on derivatives

Since it's obviously not at their fair value that derivatives are priced, how do investment banks compute the fees that they add on top of the risk neutral price ?
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### 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 ...
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### 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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### Which interest rate model for which product

Given the multitude of existing interest rate models (ranging from simple to very complex) it would be interesting to know when the additional complexity actually makes sense. The models I have in ...
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### hedging of a spread option with call

We have 2 underlying $S^{1}$ and $S^{2}$ with BS dynamic under the risk-neutral measure (r constant...) I found the (big) PDE satisfied by the price function $u(t,x,y)$ of a call spread whose payoff ...
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### 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 ...
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### 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 ...
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### 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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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} = ... 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.... 4answers 736 views ### Why does it take so many lines of code to price even the simplest of options with QuantLib I have been looking at QuantLib I am trying to figure out why I need to write so much boilerplate code even when pricing the "simplest" of European Options using the analytical Black-Scholes formula (... 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 ... 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 ... 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 ... 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: ... 2answers 172 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 ... 0answers 136 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 ... 3answers 799 views ### Two different ways of pricing that leads to two answers This question might appear trivial to many (considering the questions on this site), but I think it reflects something fundamental that I am missing. To keep things simple, assume everyone is risk-... 1answer 61 views ### Why risk-free interest is needed for Margrabe's Formula? The source code for Margarble's formula in QuantLib is here. The implementation requires a forward price be computed: ... 0answers 111 views ### Yield for valuation of illiquid corporate bond I am trying to value a illiquid corporate bond issued at a discount to face value by a privately held company in India. The corporate bond is a sinkable bond (amortizing principle) with coupon rate of ... 0answers 52 views ### Benchmarking option pricing under stochastic interest rates I priced a long-term option (10 or 20 years) using two different models: one assumes constant interest rates, the other assumes stochastic interest rates. Is there a way (e.g. a benchmark) to ... 2answers 3k views ### Calculate Average Price, Cost, (Un)Realized P&L of a position based on executed trades We have built an algorithmic trading software and need to calculate the following parameters for each position in our portfolio. Average Price Cost Realized Profit & Loss Unrealized Profit & ... 2answers 512 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 ... 1answer 2k views ### The effect of negative interest rates on derivative pricing I am trying to get an overview of the impact on negative interest rates on financial products (in general). For the time being I distinguished the following products Vanilla options Exotic options ... 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 ... 0answers 95 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 ... 1answer 114 views ### FTAP a-la Harrison, Kreps and Pliska I was reading the papers co-authored by Harrison, Kreps and Pliska, that initiated the formal research on the connection between pricing, martingale measures, arbitrage and completeness. I have some ... 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]...
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}^...