1
vote
1answer
136 views

FX Rate dynamics

Let's suppose USD/EUR price in USD follows a GBM with $$ dS_t = rS_tdt + \sigma S_tdW_t $$ What process does EUR/USD follow in EUR?
1
vote
1answer
90 views

use synthetics for a pairs trading strategy

Let us say I want to pursue a pair trading strategy between stock A(long) and stock B(short). Can I replace this stocks with their synthetic option equivalents and have the same risk reward profile ...
0
votes
2answers
67 views

Shreve book II Question 4.6 Error?

I'm working through Shreve II, and on question 4.6, you are asked to compute $d(S_t^p)$ where $S_t$ = $S_0e^{\sigma W_t + (\alpha - \frac{1}{2}\sigma^2)t}$ I get the answer $pS_t^p[\sigma dW_t + ...
0
votes
0answers
50 views

Is the Volatility of the Fx Inverse process same as Fx

Let St = Fx and St(Inverse) = 1/Fx. Do both of these have same volatility and if so how would you prove it?
0
votes
0answers
7 views

Foreclosure Implications on CMO Cash Flows

I have a simple homework project where I am to create some models to value a CMO. Please make any simplifying assumptions necessary to provide an answer. Prepayment is simple to account for. This ...
0
votes
2answers
114 views

Why gamma for ATM option decreases as volatility increases

Why is the gamma for an at the money option less when volatility increases. Intuitively ,I thought that increasing volatility means more uncertainty,hence the option price will be more sensitive to ...
0
votes
1answer
82 views

What math concepts are used in designing volatility models

What topics in statistics and mathematics do I need to understand thoroughly before I can start to dabble with stochastic volatility models and volatility arbitrage?
2
votes
1answer
96 views

Hedging bond with CDS of different maturity

Say I buy a 10-year bond with a notional of 100k. To hedge my credit risk entirely I could buy a 10-year CDS, also on a notional of 100k. Now, if there are only 5-year CDS trading and no 10-year CDS, ...
1
vote
1answer
181 views

Eurdollar Futures

Trying to understand the Eurdollar market a little better. I understand it's the market for dollar denominated deposits outside the US (not just in Europe). They are unregulated and not subject to ...
4
votes
5answers
925 views

Do binary options make any sense?

Reading from "www.nadex.com" - the copy reads "Binaries are similar to traditional options but with one key difference: their final settlement value will be 0 or 100. This means your maximum risk and ...
0
votes
1answer
106 views

PCA on term structure of interest rates

Interest rate time series seems to be non-stationary whenever test is performed But covariance or correlation matrix is derived from term structure time series which are non stationary and later PCA ...
1
vote
1answer
66 views

When $C(K_2) = C(K_1)$ for call options with the same expiration date

The exercise is to show $C(K_1) \geq C(K_2)$ where C(K) denotes the value of a call option on a stock price S with strike price K. We assume the expiry is the same for both. I have proved this by ...
2
votes
1answer
676 views

How does Hanson's Market Maker (LMSR) work?

Implementing Hanson's Market Maker states: If the market maker wants to quote a "current price", he can. The current price for outcome 1 is: $$ \mbox{price1} = ...
3
votes
1answer
143 views

Different ways of portfolio optimization

There are different ways to optimize portfolios: $$ \max R^Tw\tag{1}$$ or $$ \min w^T \Sigma w\tag{2}$$ and finally using a risk tolerance $\lambda$: $$ \min{(w^T\Sigma w-\lambda R^T ...
1
vote
2answers
57 views

Where to get master list of mutual funds?

I cant seem to find a straight answer anywhere on Google for this. I would like to create a master list of all known mutual funds and their ticker symbol. Is it possible to get this data from ...
0
votes
1answer
58 views

ZSpread in multiple curve framework

how do I calculate ZSpread for a govt. bond in a multiple curve framework? I have not come across the exact details anywhere so I want to verify if I'm right. Below is my understanding, please correct ...
5
votes
1answer
456 views

What are the main flaws behind Ross Recovery Theorem?

Stephen Ross’ new paper claims that it is possible to separate risk aversions and historical probabilities if the Stochastic Discount Factor is transition independent using Perron-Frobenius Theorem. ...
1
vote
3answers
148 views

(Beginer on bond market) References on callable bond's pricing

I am searching for references on pricing callable bonds. I've not find any rigorous mathematical approach on the web. All I found was some soft approaches in a discrete framework. Edit: First of ...
2
votes
2answers
357 views

Curve Euribor - Euribor 3M

I'm setting up some Euribor 6M and Euribor 3M curves. So far i have all the data and quotes i need, but i'm having trouble defining the firsts points of the curve. I'm currently using 6M Euribor and ...
1
vote
2answers
56 views

Why IV shares an inverse relationship with underlying

Why does implied volatility usually fall when underlying rises and rises when underlying falls? Implied volatility is a length of one standard deviation. From this definition, is it possible without ...
7
votes
4answers
812 views

Software for decomposing structured products into plain vanilla products

Nowadays structured products (or packages) with complex payoff diagrams are omnipresent. Do you know of any software, add-ons, apps, code whatever, that enables you to enter a payoff diagram or a ...
1
vote
3answers
131 views

Greeks of self-financing portfolio

I would like to learn more about the Greeks of portfolios of options: In textbooks and websites, I commonly encounter the unqualified claim that "The Greek measure of a portfolio is the sum of the ...
1
vote
1answer
54 views

Pricing rule shall be a martingale measure

In the book "Financial Modelling with jump processes" by Cont and Tankov there is a chapter that explains martingale pricing principles. It is not extremely formal, but gives the idea underlying the ...
20
votes
9answers
3k views

How good is managed code for algo trading?

I am currently working in a firm that does algo trading. We do all of our stuff in Java. And we do make money out of it. We have debates all the time whether we would have made more money with native ...
3
votes
2answers
114 views

Relation between IV and SD

In option pricing, volatility naturally appeared through the Black-Scholes (BS) model where it was a coefficient for the linear diffusion term $\sigma S\,\mathrm dW_t$, and as such represented the ...
1
vote
1answer
32 views

finance - using CAPM [closed]

The risk-free rate is 4%, and the expected return on the market portfolio is 12%. Using the Capital Asset Pricing Model: a. What is the risk premium on the market? b. what is the required return on ...
3
votes
2answers
165 views

Optimal Portfolios

In modern portfolio theory, one famous problem is the Markowitz mean variance optimal portfolio, defined by solving ...
0
votes
2answers
109 views

float64 to store price data: is precision sufficient?

I am looking to store equity price data in a hdf5 table. The use will be purely as a historical archive, not as day-to-day data source. Options One option would be to store base10 significand and ...
0
votes
0answers
33 views

Web Based Market Profile Code

I am looking for someone who knows of or has access to web based charting code using Market Profile. Does this exist out there? I would prefer the source code so I can make changes to it. Any ...
0
votes
0answers
35 views

volatility grouping

I was working on risk levels of a combined portolfio (includes options,futures as well as stock). While using greeks we can asses some value of a portolio, but when one needs to assess some kind of ...
2
votes
1answer
171 views

Basic question on LIBOR-OIS swap

I'm just starting a pricing class and am a little confused by a statement in a class reading (a fed report). It goes something like this: "A bank borrowing at the 3-month LIBOR rate of 2.10 percent ...
0
votes
0answers
44 views

Sample long/short portfolio profit and loss template

Does anyone have a suggestion of where I might be able to find a profit and loss template for a long/short equity portfolio? Thank you in advance.
0
votes
0answers
67 views

Derivation of the formulas for the values of European asset-or-nothing and cash-or-nothing options

The asset-or-nothing European option pays at t = T the value of the stock when at time T that value exceeds or is equal to the exercise price E, and nothing if the value of the stock is below E. So, ...
4
votes
1answer
66 views

BlackProcess' constructor $x_{0}$ argument in QuantLib

I am currently using BlackProcess to price options and I have a doubt related to the $x_{0}$ argument of the constructor: I've figured out it should be the forward ...
5
votes
3answers
317 views

What is the tau parameter in the Black-Litterman model?

Could someone please provide me with a clear and concise definition of the $\tau$ parameter in the Black-Litterman model? It seems one is rather hard to come by. I understand it to be the 'weight on ...
2
votes
0answers
130 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) = ...
22
votes
8answers
11k views

Digital Signal Processing in Trading

There is a concept of trading or observing the market with signal processing originally created by John Ehler. He wrote three books about it. Cybernetic Analysis for Stocks and Futures Rocket Science ...
2
votes
1answer
115 views

Help with integrating stochastic calculus expression from yield curve model

I am very rusty on stochastic calculus, and I am having trouble integrating the following simple term from a yield curve model: $$z(t)=\int_0^t\exp(-k(t-s))dW(s)$$ Any suggestions appreciated.
4
votes
2answers
391 views

CDS Spread and Par Bond Yield Spread

It is claimed that the credit default swap (CDS) spread should approximate the risky par bond yield or coupon rate spread from the riskless bond on the same entity. This comes about when we assume ...
0
votes
0answers
26 views

What is the intuition behind the relationship between herding and trade (or investment) size?

I am studying herding behavior among investors, in particular I found a u-shaped relationship between herding and trade (or investment) size. As such, traders with the smallest or the largest trades ...
1
vote
1answer
44 views

Optimal Upper and Lower Bounds

For the following exercise: Give optimal upper and lower bounds on the price today for a product that pays a function of the spot price, $S$, of a non-dividend paying stock one year from now, there ...
-2
votes
1answer
31 views

Question about “short” in this sentence

I was reading an article by David Stockman from (http://davidstockmanscontracorner.com/take-cover-now-they-dont-ring-a-bell-at-the-top/). He uses the word "short" in a way I'm unfamiliar with. If you ...
0
votes
0answers
27 views

How to calculate intraday implied vol on the last day of trading an OTM option

i've been trading globex options on US Treasury futures, but my option calculator only takes the date as the time input..so on the last trading day, the model assumes all values are errors because the ...
0
votes
1answer
110 views

Black-box local volatility pricer

I am testing a local volatility pricer by comparing its results under two settings: Pricing a 5yr ATM call option with a flat volatility of $0.194$ Pricing the call option with the typically shaped ...
2
votes
2answers
49 views

CVaR reformulation correct?

Conditional Value at Risk (CVaR) is given as: $$CVaR_\alpha(X)=\frac{1}{\alpha}\int_{0}^{\alpha}VaR_\beta(X)d\beta=-E(X|X\leq-VaR_\alpha(X))=-\frac{1}{\alpha}\int_{-\infty}^{-VaR_\alpha(X)}x \cdot ...
0
votes
2answers
116 views

Long/Short Backtesting Set up

I am going to be backtesting a Long/Short equity strategy and need some guidance on how best to deal with the short book. I was thinking that for each portfolio I would go long 50 equities and go ...
2
votes
2answers
819 views

How to price a bond without paper during interview?

I heard that this kind of questions appear a lot in the interviews. Here is one I saw from Galssdoor: Price a bond with coupon rate 3%, yield 9% and maturity 10 years. What is the typical way to do ...
2
votes
2answers
125 views

Why do Earnings Per Share matter?

This has been bugging me for a while. I've consulted all sorts of guides, but none gave me a satisfactory answer. My question is: why do Earnings Per Share (EPS) matter? What is it about this metric ...
0
votes
0answers
10 views

CFD on warrants or options?

I'm looking for CFD-type contracts based off warrants or ETO prices; does such a thing exist? I'm interested in Asian markets; Hong Kong, Singapore, Japan.
2
votes
1answer
237 views

How to get real-time data for Fama-French model?

For Fama-French model we need SMB (small[market cap] minus big) and HML (high[book-to-market-ratio] minis low). I want to ...

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