# All Questions

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### 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 ...
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### 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 ...
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### 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 ...
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### ETNs as bank funding

I've just read the article in the link below and would like to know if someone can elaborate on a statement. I have added the whole paragraph, but highlighted the part about the use of ETNs as cheap ...
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### 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 ...
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### 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 ...
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### Discounted Stock Price

I have the following Question : Prove that under the risk-neutral probability p the stock and the banjaccount have the same average rate of growth. In other words, if $S_0 , S_N$ are the initial ...
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### 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 ...
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### 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, or the Baneish M score). ...
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 ... 0answers 18 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 ... 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! ... 1answer 69 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}, ... 1answer 40 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. ... 1answer 20 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. ... 0answers 37 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 ... 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 ... 2answers 478 views ### Demonstration of Ito's correction term/lemma in binomial tree I am preparing an undergraduate QuantFinance lecture. I want to demonstrate the ideas of Ito's correction term and Ito's lemma in the most accessible manner. My idea is to take the "working horse" of ... 5answers 443 views ### Construction of “vol of vol” How do you construct something that lets you buy "vol of vol"? not necessarily for VIX, but any particular stock or index. 1answer 20 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 ... 3answers 1k views ### How does Yahoo finance calculate Beta? I am trying to replicate the beta value that yahoo calculates but I am getting different results. According to Yahoo, its beta is calculated using 5 year returns against the SP500: yahoo beta I ... 2answers 314 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 ... 2answers 5k views ### Transformation from the Black-Scholes differential equation to the diffusion equation - and back I know the derivation of the Black-Scholes differential equation and I understand (most of) the solution of the diffusion equation. What I am missing is the transformation from the Black-Scholes ... 1answer 36 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? 0answers 21 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? ... 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 ... 1answer 34 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 ... 1answer 13 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: ... 1answer 62 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 ... 1answer 62 views ### Reuters RIC chain for Eurodollar midcurve options Can someone please tell me what this is? Thanks. Edit: The RIC for the straight eurodollar options is 0#GE+, I need RICs for the 1,2,3,4 mid curve options which the IMM/IOM calls GE0, GE2, GE3, ... 2answers 3k views ### Can the J language be used as an effective alternative to Q/Kdb+? I hear a lot about Q/kdb+. I've never had the opportunity to use it for anything real but have played with it using their trial license and found it intriguing (if not somewhat mind warping). I've ... 6answers 11k views ### How to calculate historical intraday volatility? Sorry for what must be a beginner question, but when I went to write code I realized I didn't understand exactly how historical volatility, or statistical volatility, is defined. Wikipedia tells me ... 1answer 31 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 ... 0answers 12 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( ... 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 ... 0answers 11 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 ... 2answers 2k 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 ... 2answers 111 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 ... 1answer 101 views ### What are the canonical references on wholesale credit risk management? I am trying to read up on "Wholesale credit risk ", but I can't find any useful references. Why is the emphasis on wholesale? 1answer 19 views ### Leverage on ETF the same effect as on portfolio? While we know that leveraged ETFs do decline in value to zero given infinity, can we also say the same with our portfolio value if we use leverage in our trading activity and seeing our portfolio ... 1answer 38 views ### Technical Analysis - OBV indicator calculation in R Here is a few references about OBV calculations: http://ta.mql4.com/indicators/volumes/on_balance_volume ... 2answers 157 views ### Breaking Down Option P&L I am comparing the MTM valuations of two risk systems, with respect to FX Options. My Question is can I quantify the difference in MTMs given the following: System1: AUD/JPY, MTM = USD 461,000, ... 0answers 18 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). $$The risk-neutral pricing formula states that if \mathbb{Q} is any ... 1answer 96 views ### Using multiple regression to determine coefficient that feed into another multiple regression problem Ok so it is a bit of a complicated problem so I hope I explain this well. I currently have a multiple regression formula where I input 3 items and the output is expected growth. Each of these input ... 1answer 484 views ### How to price a Swing Option? I'm working in the commodity market and I've to price Swing Options with MATLAB, preferably with finite element. Has anyone already priced these kind of derivatives? I'm thinking about using the ... 1answer 337 views ### How to fully replicate ADX + DI Indicators in Excel? For black box testing, I was hoping that I could replicate the ADX + DI+ and DI- indicators that are provided in trading platforms such as ThinkOrSwim, ScottradeElite etc. However, I noticed that ... 1answer 39 views ### Can not understand options pricing [on hold] As we are seeing here http://www.theoptionsguide.com/strike-price.aspx Relationship between Strike Price & Call Option Price Relationship between Strike Price & Put Option Price I do not ... 1answer 89 views ### Cash flow diagram, interest rate inflow series I have a econ midterm coming up soon and stumbled upon this question. My approach is: 2C=800/(1.12^2)+1200/(1.12^6)=125.71 or C=1245.71/2=622.85 But I have a gut feeling this is wrong. I believe the ... 2answers 92 views ### How can I make this portfolio self-financing? a_t S_t = number of shares (S_t is stock price at t), S_0 = 1 b_t \beta _t = saving account value , d \beta_t = r \beta_t dt, r= interest rate So the value of the portfolio:$$V_t = ...
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 $\sigma>0$ ...