2
votes
3answers
170 views

Implied Probability of Default from Bond Prices

I am trying to build out a probability of default model for a bond. Given the current price of a bond and the current risk free rate, I am trying to calculate the probability of default. So assume a ...
2
votes
1answer
81 views

Replicating the short part of a long-short trade using inverse ETFs

I devised a pair trading strategy going long XXX and short B*YYY. B is the quantity of shares of YYY I need to short. The problem is I can’t go short on YYY, but there is an inverse ETF for YYY ...
2
votes
1answer
54 views

Weighting several returns over different time frames

I have a set of annualized returns over 4 time periods: 10yr, 5yr, 3yr and 1yr. Is there a way to weight each return to have a "more representative" return?
1
vote
1answer
98 views

Arbitrage Strategy Proof in Bjork

In Tomas Bjork's Arbitrage Theory in Continuous Time (or here), $\exists$ this proposition Proposition 2.9 Suppose that a claim X is reachable with replicating portfolio h. Then any price at t=0 of ...
6
votes
3answers
759 views

cointegration applied to Portfolio Construction & Risk management

There are all sorts of applications of cointegration to generating alpha on mean-reverting timeseries: comparing spot vs. futures, bond spreads, identifying mean-reverting residuals, etc. But there ...
-1
votes
1answer
69 views

how to calculate avarage variance and avarage covariance

I would like to figure out how to calculate av.variance and av.cov. I know how to calculate portfolio variance( for large ...
1
vote
1answer
307 views

Hedging a Long Equity Swap by Shorting the Stock

Suppose that I enter an Equity Swap, such that I pay a floating rate and I receive the equity return. The payment is every one year for both the rate and the return, and the swap expires in one year. ...
2
votes
0answers
67 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 ...
2
votes
0answers
251 views

Microstructure effects for a market maker? [closed]

When building a market maker that rests limits orders on both sides of the book, what microstructure effects should we be looking at to price those orders? I’m targeting liquid futures markets, and ...
5
votes
3answers
347 views

Deriving Interest Rates

I am trying to teach myself about interest rate swaps, how they are priced, etc... Easy enough - just comparing cash flows of fixed and floating rate bonds. However, what I'm struggling with is how ...
4
votes
1answer
236 views

Risk-neutral pricing in incomplete markets

I know that in order to use the risk-neutral valuation principle, that is, pricing options as their payoff function under a risk neutral measure, one has to have a complete market. But in the ...
2
votes
1answer
177 views

Boundary condition for Asian Option under Black-Scholes model

I am looking at Kemna and Vorst's paper: A PRICING METHOD FOR OPTIONS BASED ON AVERAGE ASSET VALUES. see http://www.javaquant.net/papers/Kemna-Vorst.pdf Let $\text{d}S_t = S_tr\text{d}t + ...
3
votes
1answer
466 views

Pricing a FixedRateBond in Quantlib: yield vs TermStructure

I am trying to price a simple U.S. treasury in QuantLib, using two methods. The first method calls FixedRatebond.dirtyPrice(...), passing in a YTM and other parameters. The second method involves ...
1
vote
1answer
153 views

Short-term directional trading

Did value of ratio between informed and uninformed traders at market, making difference to profitability of short-term directional trading on that market? My guess is yes and better play short-term ...
1
vote
3answers
266 views

CDS Spreads and Equity Volatility

Why does CDS spreads track the implied volatility on equities? What is the fundamental relationship that would keep the two inline from deviating too far from each other? My speculation: Could it be ...
5
votes
1answer
280 views

PDF Calculation by Fourier Inversion of Characteristic Function for Affine Intensity Process in Matlab

I'm trying to use the Fourier inversion formula to plot the PDF of an Affine Stochastic Intensity Reduced Form Credit Model, given its characteristic function. The characteristic function of an ...
2
votes
1answer
108 views

Swaptions vol trading lognormally

What does this mean: "Front-end vols have been trading lognormally while longer tails have traded normally." I read this in a research report, in the context of ...
2
votes
0answers
24 views

How do derivatives affect capital structures?

Yesterday, I was at a lecture where the speaker said that the impact of derivatives was often to make senior debt, in effect, subordinated debt (in terms of priority, recovery rates, etc.)? How do ...
1
vote
1answer
867 views

robust open source Kalman filter library in C++

I would like to know if anyone has experience with a good open source kalman filter implementation in C++ that I could use. I require an implementation that supports computation of likelihood similar ...
1
vote
2answers
114 views

Is the purchase of a stock publicly accessible?

If an investor bought a stock, could another private party access that information anywhere? Does the SEC/exchange itself create a real time/ historical record of who holds what stocks, and is that ...
0
votes
1answer
47 views

What does 2 Year Annualized mean compared to 1 Year Annualized

I am looking at a company's financial report and there is a table in it that lists returns over different annualized periods. It ranges from 1 year to 20 years. Would a 2 year return in this table be ...
3
votes
1answer
154 views

Electricity market : how to design an optimal hedging strategy using spot and futures markets for an industrial consumer?

Here is the problem : we should adopt the point of view of an industrial company which purchases electricity as an input in its production line and which wants to achieve the following two goals : ...
1
vote
2answers
98 views

Basis Risk for Futures/Options

I am just reading about basis risk. It is being described as risk of the price of the hedging instrument not fluctuating the same as the instrument itself. I was just wondering, if we bought a ...
0
votes
1answer
203 views

How to price zero coupon bonds with short term rates model?

I want to find the price of Zero coupon bond given a short rate model. I think about Merton, Vasiceck, CIR, Ho & Lee models. 1) Given a simulation of $r_t$ how can I calculate $ P(t,T) = ...
2
votes
1answer
37 views

What different techniques exist for modeling exotics near payoff discontinuities in Finite Difference method?

If you are modeling an exotic, like a binary or a barrier, and hedging it with vanillas that have strikes quite close to the exotic's strike, then a large asset step size, for example, $\delta S = ...
0
votes
0answers
57 views

Kalman Filtering with Linear Restrictions

A question on this topic has been asked before: Combining a linear Kalman Filter with additional linear constraints? and I checked out some of the references given: ...
1
vote
1answer
48 views

Which more topic should be covered in my undergraduate program? [closed]

Below is the topics covered in my undergraduate economics program. I want to know which course should I take to get a full overview of topics in finance today. Econometrics Micro, Macro Economics ...
0
votes
0answers
77 views

Option payoffs and replicating payoffs

I've come across the below question which has no answers to it and I was hoping someone could provide some help. I know it quite a long question and I appreciate any help with this. An investment ...
0
votes
1answer
129 views

Intuitive understanding of Black-Scholes pricing

The Black-Scholes formula entails market completeness, so the price of an option is only the cost associated with dynamically hedging the option. Where does this cost come from? I don't see how ...
1
vote
4answers
2k views

C# Broker API for FX Trading

I am looking for a broker who provides a free trading API for FX. The goal is to develop at-home algorithms in C# (possibly Qt) to run on a fake portfolio, and then later on real money with ...
0
votes
2answers
504 views

Forex brokers with free API compatible with Node.js

I have a Forex trading signal generator written in Node.js and now I am looking for a Forex broker with a free Node.js compatible API. The requirements are simple: be able to send new trade orders ...
3
votes
1answer
138 views

Are there any good benchmarks for performance of vanilla option pricing code?

I've seen parsec (http://parsec.cs.princeton.edu/index.htm), which has a PDE pricing component, but the distribution is enormous and I haven't bothered to try to download it for review. I'm ...
0
votes
1answer
139 views

Debt vs. Equity?

What determines whether an investment should be made using debt vs. equity? For example, startups are often financed with equity, while mortgages are always financed using debt. What characteristics ...
0
votes
2answers
144 views

BInary Option implied volaltility

How is implied vol calculated if the quoted prices are out of the range for any possible volatility? E.g. Current quote on CBOE for options expiring on Aug 16, 2014 ...
1
vote
1answer
173 views

What is PCA and how does it relate to eigenvectors and eigenvalues?

What are the principal components? How they are calculated? What is their relationship with eigenvalues and eigenvectors? This is a lead-in question to explain PCA basics. EDIT: PCA is implemented ...
3
votes
4answers
188 views

Does an implied volatility always exist for a binary option?

I'm trying to compute the implied volatility of a binary option but I cannot get some of the strikes to reach a convergent solution using either a Monte Carlo pricing model or an analytical Black ...
0
votes
1answer
175 views

Controling ex-post volatility by ex-ante limits

In the context of mutual funds the KID directive forces us to calculate 5 year ex-post volatility of a (market) fund (weekly returns). Thus each week we look back in the past and calculate volatility ...
12
votes
4answers
2k views

Is there any good research on support and resistance?

Could somebody advise me on where to find good literature on the justification or motivation for using support and resistance lines - and also lines of maximums and minimums. In finance, it is ...
1
vote
0answers
157 views

The option values are different from two r package - foptions,rquantlib

The results are very different.I know the code from quantlib and the result of quantlib seem right(close to market price). Is there anyone know why the value from fOptions is so large or fOptions used ...
5
votes
1answer
364 views

Optimal trading strategy in toy world of simple Hidden Markov model with Gaussians

I want to solve the following optimization problem: What is the optimal general trading strategy (in the sense of the highest Sharpe ratio) on a time series which is the result of a Hidden Markov ...
0
votes
0answers
27 views

Recording Bill payment of Credit Sale with existing Customer Deposit

Need your help for below scenario : 1) Sale of an item for 200.00. But customer pays 250.00 and asks to keep $50 as an advance for next transaction. For this transaction, Journal Entries will be as ...
3
votes
3answers
273 views

Determining optimal trading signals (buy/sell) from past data

Let's say we have a stock which our only actions are buy, sell and hold (with or without shorting). If we have sufficient past data of the stock, how can you determine the optimal trading action ...
5
votes
1answer
459 views

What is the correct procedure to choose the lag when preforming Johansen cointegration test?

When preforming Johansen cointegration test for 2 time series (the simple case) you need to decide the lag you want to use. Doing the test for different lag levels returns different results: for some ...
2
votes
1answer
303 views

What features does q /KDB provide for HFT use?

It appears q/KDB is being using for Time series analysis for HFT. What are some of the advantages of using ...
0
votes
2answers
1k views

Is there a step-by-step guide for calculating portfolio VaR using monte carlo simulations

I am trying to determine a step-by-step algorithm for calculating a portfolio's VaR using monte carlo simulations. It seems to me that the literature for this is extraordinarily opaque for something ...
1
vote
2answers
273 views

calculate gamma value using finite difference method

I try to use the finite difference method to get the approximately gamma value, but there is an issue I can't solve. First, I set $h$ to 1 basis point of underlying asset value, but the result is not ...
1
vote
0answers
141 views

VaR mapping - Forward Foreign Currency Contract

I have a question about VaR mapping for FX forwards. Please bear with me while I outline the problem. Philippe Jorion's book discusses VaR mapping; a means to break down complex instruments into ...
5
votes
1answer
97 views

Estimating the Hurst exponent in short terms in developed markets

In the Proceedings of the Estonian Academy of Sciences, Physics and Mathematics (2003), I saw the following sentence: Surprisingly, in the case of developed markets, short-term $H$ results showed ...
8
votes
3answers
2k views

How does volatility affect the price of binary options?

In theory, how should volatility affect the price of a binary option? A typical out the money option has more extrinsic value and therefore volatility plays a much more noticeable factor. Now let's ...
0
votes
1answer
356 views

Directional/Non-Directional Risk

Can someone explain to me what is direction/non-directional risk? Went through few sites but couldn't understand much.

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