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6
votes
4answers
560 views

Replicating portfolio and risk-neutral pricing for interest rate options

For equity options, the pricing of options depends on the existence of a replicating portfolio, so you can price the option as the constituents of that replicating portfolio. However, I am not seeing ...
4
votes
2answers
133 views

Variance swap replication and variance vega

Noob here. I've been trying to gain a better understanding of variance swaps and what better way than to replicate it with a portfolio of better understood instruments. I have read the GS 1999 ...
1
vote
1answer
46 views

Proving there exists no arbitrage opportunities given 3 states and 2 assets

Assume there are 3 states of the world: w1, w2, and w3. Assume there are two assets: a risk-free asset returning Rf in each state, and a risky asset with Return R1 in state w1, R2 in state w2, and R3 ...
2
votes
0answers
29 views

How to properly assess the costs of replicating an index via futures contracts?

I would like to validate this sentence, coming from a WSJ article: The cost of holding a Eurostoxx 50 future, for example, has climbed from an average of 0.07% of the contract value since 1998, ...
2
votes
0answers
79 views

Simple Forward Interest Rate Proof

Just trying to check my logic here: Let $Z(t,T)$ be a Zero-Coupon Bond with maturity $T$ bought at time $t$, $S_m$ be the spot interest rate for time $m$ and $S_n$ for time $n$ respectively, where $n ...
0
votes
0answers
8 views

Replicating portfolio of a “delayed” call on zero-coupon bond

Let $T < T_2 < T+D$ and $B(t,T)$ the value at time $t$ of zero-coupon bond of maturity $T$. We suppose its volatility to be a deterministic function of $t$ and $T$. Let's consider a "delayed" ...