0
votes
1answer
10 views

What's the point of discounting in risk-neutral pricing?

Let $\phi$ be a self-financing strategy that replicates a time $T$ option payoff $X$ on stock $S$. By definition of a trading strategy, $\phi$ is previsible. Finally, let $V_t$ be the time $t$ value ...
-3
votes
0answers
7 views

Yield and interest rate? [on hold]

Are they the same thing? Is yield the annualized return rate? Why when yield rise, yearly return increases but price falls?
0
votes
0answers
13 views

Expected Utility and $\log$

I've just started reading about expected utility and utility functions and have the following question. $\textbf{Question:}$ An investor has an initial wealth of 100 and a utility function of the ...
1
vote
1answer
19 views

Markowitz portfolio optimization question

I am studying the Markowitz portfolio optimization theory, and I just wanted to ask if I understood this correctly. For a stock portfolio we distinguish two kinds of risks: an unsystematic risk, which ...
0
votes
0answers
19 views

Need for Binomial Representation Theorem

In some texts (e.g. Baxter & Rennie, Shreve I) the binomial model is first constructed using the usual backward induction argument, and it is concluded that by no-arbitrage the time $t$ value of a ...
0
votes
1answer
25 views

Portfolio volatility

Problem True or fale? The stock of a firm has an expected return of 10%, and a volatility of 10%. The weight of the stock in a portfolio is 5%, and the correlation of the stock’s return with the ...
1
vote
1answer
37 views

Option Pricing under Jump Diffusion Models

I was wondering what the overall approach/intuition behind how to price options under Jump Diffusion Models. My understanding is under Diffusion models such as Geometric Brownian Motion (Black ...
1
vote
2answers
29 views

Is the Binomial Tree Model not self-financing?

Consider a 2-period binomial tree where the derivative price is $f$ and the stock price is $S$. Also, let the bond be deterministic with continuous growth rate $r$ and initial value $B_0$. binomial ...
1
vote
0answers
17 views

How to test if two portfolios have the same composition

I'm facing two different portfolios in CAPM framework derived as $$\omega_P=\Sigma^{-1}\frac{E(r)-r_f}{H}(\mu-\iota'r_f)$$ on the same assets but for example on different time sample or on the same ...
-1
votes
0answers
42 views

Is the Altman Z-Score broken?

When I try to predict future returns with with the Altman Z score, it fails. That would likely not be the case if it predicted bankruptcy well (e.g. the Piotroski F score). It seems to predict ...
0
votes
1answer
30 views

Derivation o HJB equation

I am trying to derive the HJB equation in a stochastic setting. Let me exemplify my problem with the simplest case where there is no control, just one state variable. Assume the payoff is given by $$ ...
0
votes
0answers
20 views

How to create a basket of currency pairs with the lowest correlation in R?

My strategy is designed to buy and sell all assets of a universe and rebalance periodically. It goes either long or short. To limit risk exposure to a single currency I would like the assets in the ...
-2
votes
0answers
21 views

Credit Risk question

Consider two 7% (annual) coupon corporate bonds, each with one year to maturity. Both are expected to default with 20% probability. Investors demand an expected return of 4.5% on both bonds. The only ...
-3
votes
1answer
30 views

Zero coupon bonds [on hold]

Assume the zero-coupon bonds from 1 year to 4 years are all available, and the current 1-year, 2-year, 3-year and 4-year spot rates are 4%, 5%, 6% and 7% accordingly. Interest rates are annually ...
1
vote
0answers
41 views

Arbitrage question

Consider a hypothetical Payment in Kind (PIK) bond of XYZ Corporation. The bond has 2 years to maturity, a face value of $1000, and has an annual coupon rate of 10%. Coupons are paid annually. XYZ ...
0
votes
0answers
17 views

How to identify the orders p and q for ARIMA model using least squares method?

I would like to identify the orders p and q for ARIMA model using least squares method in Matlab. I have got also two data files (one with noise and one without) Previously I identified p and q for ...
0
votes
1answer
23 views

How to effectively hedge a Fixed-Term deal in a foreign currency?

Assume my firm is based in USD and agrees with some counterparty to buy, at time $T$, some quantity $Q$ of asset $A$ for a fixed price $K$. Assume also that $A$ prices and $K$ are denominated in EUR. ...
0
votes
1answer
42 views

A Difference between Local Vol and Stochastic Vol Models

For the purpose of this question a local vol model is a 1d SDE which specifies the price process and we have a contingent claim that depends on those prices (in general, at multiple times). e.g. ...
1
vote
1answer
22 views

simple, intuitive barrier option derivation

Is there a simple integral that gives barrier option prices without having to deal with messy, hard PDEs and change of variables I understand there is a reflection principle such that the simulation ...
2
votes
2answers
61 views

Negative high frequency intraday volatility - Zhou estimator

To estimate high frequency tick data stock intraday volatility, I have read Robert Almgren's notes7.pdf http://www.cims.nyu.edu/~almgren/timeseries/notes7.pdf where he talks about the bias free ...
0
votes
0answers
25 views

Calculating VaR with Monte Carlo simulation

I would like some help here :) I have a problem calculating VaR with the Monte Carlo Simulation. I have followed then next steps, is this a right way to calculate VaR or I need something more? ...
1
vote
1answer
36 views

Why we consider second derivative w.rt price but only first derivative w.r.t time and volatility

What is the reason (better if it is intuitive, and not too math heavy), that when we talk of Greeks, we consider second derivative with respect to price (gamma), but only first derivative with respect ...
3
votes
1answer
66 views

Why must a replicating portfolio be self-financing?

If I have a trading strategy such that at each time $t$ I own $\Delta_t$ units of stock $S_t$ and $\psi_t$ units of bond $B_t$, it is a replicating strategy for some claim with time $T \geq t$ payoff ...
0
votes
1answer
32 views

Best way to scan 1000 stocks? [on hold]

I am trying to identify the stocks which gap up during a period, and then get the relative information, such as volume on the day and the prices before and after that day. I'm just experimenting and ...
1
vote
0answers
14 views

Value-at-Risk Calculation with respect to the Capital Requirements

I want to calculate the Value-at-Risk at date $t$ in such a way that I minimize the capital requirements given as \begin{align} \text{CR}_{\,t+1\,:\,t+250} = \sum_{h=0}^{249}\max\left( ...
0
votes
1answer
15 views

Where to get historical daily settlement price of each VSTOXX futures contract

I'm doing some analysis on VIX and VSTOXX futures and require historical prices of each contract as a result. VIX info is free to download on CBOE website: ...
0
votes
0answers
14 views

Can Yahoo Finance API work for non-US markets?

I am trying to fetch ticker prices and historical prices for major Asian exchanges (HKSE, SGX etc). I am trying to use yahoo finance API, but it is not returning any data for even SingTel, which is a ...
2
votes
0answers
20 views

Why Must Dividends Be Reinvested to Use Risk-Neutral Pricing?

Assume the price of a stock $S_t$ paying continuous dividend $a$ satisfies $$ dS_t = S_t\left((\mu - a)dt + \sigma dW_t\right). $$ The risk-neutral pricing formula states that if $\mathbb{Q}$ is any ...
4
votes
1answer
72 views

R package for portfolio

In the context of modern portfolio theory, one often wishes to minimise $\mathbf{w}^{\mathrm{{\scriptstyle T}}}\boldsymbol{\Sigma}\mathbf{w}$ subject to $\mathbf{w}^{T}\boldsymbol{\mu}=c_{1}$, ...
2
votes
1answer
83 views

Density of Geometric BM via Fokker-Planck

Attempting to derive density of a GBM (which we know is log-normal) the long way, using the Fokker Planck-equation. Can't figure out where I went wrong - would appreciate a few sets of extra eyes! ...
1
vote
2answers
74 views

Estimate simple option price without a calculator

I have been to two different interviews for jobs related to option trading, and both time I have been asked a question, which is pretty basic, and still I could not answer it. If you have an European ...
0
votes
1answer
22 views

Order Book vs Wallet Updates

Good morning, i am in the middle of developing my own stock exchange system and have implemented limit orders (basics) matching. The system is just a DIY solution for my own purposes and for fun ...
-4
votes
1answer
40 views

Can not understand options pricing [on hold]

As we are seeing here http://www.theoptionsguide.com/strike-price.aspx Relationship between Strike Price & Call Option Price Relationship between Strike Price & Put Option Price I do not ...
1
vote
2answers
92 views

How can I make this portfolio self-financing?

$a_t S_t$ = number of shares ($S_t$ is stock price at $t$), $S_0 = 1$ $b_t \beta _t$ = saving account value , $d \beta_t = r \beta_t dt$, $r=$ interest rate So the value of the portfolio: $$V_t = ...
10
votes
2answers
347 views

Is R being replaced by Python at quant desks?

I know the title sounds a little extreme but I wonder whether R is phased out by a lot of quant desks at sell side banks as well as hedge funds in favor of Python. I get the impression that with ...
0
votes
0answers
32 views

High frequency price forecast model ARMA GARCH or another?

Can you reccomend model for high frequency data (1 second and less) (returns and volatility forecasting)? Most papers use ARMA, GARCH etc in 1 minute and lower time frame. PROBLEM ARMA does not know ...
1
vote
1answer
42 views

Why is the black-scholes model arbitrage free when σ>0?

I want to show that: if $σ$ is positive then there is no arbitrage in the model, even if $r > µ$. Whilst I have satisfied this for $ r > \mu$, I cannot see why the conditioning on $\sigma>0 $ ...
0
votes
1answer
31 views

Negative time value european options

I have a basic question for which I feel like I should have found the answer by googling it, but I didn't get a definitive answer, so here I am: Can the time value for a plain vanilla (European) ...
5
votes
2answers
113 views

Why dynamics of local volatility is wrong?

In Dupire's local volatility model, the volatility is is a deterministic function of the underlying price and time, chosen to match observed European option prices. To be more specific, given a ...
-3
votes
1answer
52 views

Show that the equation solves the Black-Scholes PDE

I have the solution as given Based on this, I have to show that this solves the Black-Scholes formula It means that I should take the partial derivatives of the solution above and then receive the ...
2
votes
1answer
37 views

Why can a CDS indices be used as a bond market index?

I don't understand why the iTraxx indices family, which are credit default swap indices, are in practice often used to gauge the bond market. How are CDS prices related to bonds prices ? And what ...
3
votes
0answers
48 views

Computing Value at Risk for portfolio in R

I know how to compute VaR with long positions using PerformanceAnalytics. What about a portfolio consisting in two equities A and B, 100 USD long positions in each, and 2 stock options for the same ...
1
vote
1answer
30 views

Z-Score calculation for a win-loss streak

I am trying to find the correlation between wins and losses by applying Z-Score according to formula attached below. I put them in an array by assigning 1 to wins and -1s to losers. I am trying to ...
0
votes
0answers
8 views

What is the difference between simple interest and simple discounting? [on hold]

I have been given the following statements: "Simple interest: $C$ now $\equiv (1+in)C$ in $n$ years; $C$ in $n$ years $\equiv \frac{C}{1+in}$ now. Simple discounting: $C$ in $n$ years $\equiv ...
-2
votes
0answers
37 views

How much does Axioma risk model cost?

does anyone know the pricing scheme of Axioma's risk models? I heard that they are much cheaper than Barra, which can easily go above $100k per year per country/region. PM is welcomed. thanks
1
vote
1answer
37 views

Cointegration tests: how do you accurately test the necessity of time trends in the Johansen and Engle-Granger Test?

Is there a correct and up to date procedure? I just run the equation in VEC form and test the significance of the time trends? What are the possible problems that I should be aware of?
0
votes
0answers
34 views

Black-Scholes model [on hold]

You take a short position in one European put option contract, with strike price 100 and maturity six months, on a stock that is trading at 100. The annual volatility of the stock is constant and ...
0
votes
2answers
50 views

Why does the short rate in the Hull White model follow a normal distribution?

Consider Hull White model $dr(t)=[\theta(t)-\alpha(t)r(t)]dt+\sigma(t)dW(t)$ when we solve the SDE above we have $r(t)=e^{-\alpha t}r(0)+\frac{\theta}{\alpha}(1-e^{-\alpha t})+\sigma e^{-\alpha ...
1
vote
0answers
32 views

Short volatility strategy using strangles

For a short volatility strategy using option strangles, is it better to target a fixed premium to earn? Or a fixed vega? Objective is to maximise the return/risk (sharpe) of the strategy. Any help ...
1
vote
0answers
16 views

Show that in an arbitrage-free and non-redundant market a certain set is compact

Some notation: We consider a financial market with $d+1$ assets, the $0$-th asset is considered the risk-free asset, the others are the risky ones. The vector $\overline \pi \in \mathbb R^{d+1}$ ...

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