Hot answers tagged derivatives
30
Visualization should lead to truth and understanding. As such, I find that simple visualizations tend to be the best. My favorite visualization for showing relationships is the scatterplot. Once you start to even introduce a line plot, you are implying continuities between data that may not exist. And trying to introduce more advanced visualizations like ...
16
The Google Motion Chart is a particularly elegant visualization for 'replaying' time series data. There is also an R package to interface with it.
9
I feel that the best way to answer your question is to first quote your problematic idea and then carefully explain the subtle alternative. :)
The derivation of the Black-Scholes PDE is based on the assumption that the price of the option should change in time in such a way that ... And my question is: Why do we assume that the price of the option has ...
8
Shane's advice is good. I think it's worth adding the following two techniques not already mentioned:
Self-Organizing Maps (SOMs)
Seriation (pdf pertaining to R package seriation, but great intro to the topic).
They are not explicit visualize techniques, per se. Instead, they are algos that transform underlying data in ways that aim to lead to ...
8
Nanex has an interesting way of showing the order-book:
The following images show CME's emMni future (S&P 500) depth of book and trades. The images are rainbow (ROYGBIV) color coded by the relative size at each depth level. Red indicates a lot of size, violet indicates size approaching 0. Note that a full minute before each event, the depth starts ...
8
That's a complicated question. There are many paths.
One path is to build a model of the underlying supply/demand relationships. For example, the sudden loss of a power supplier (or transmision corridor) shifts the supply curve to the left spiking the price. The key to the game is data, data, and more data (price, weather/wind, season, power loads, ...
6
Market makers, obviously, have to be willing to short an option. They will delta hedge their positions to limit risk.
As for investors, they can aim for a buy-write strategy to collect extra income in lieu of unlimited upside.
And lastly, someone who owns a stock he can't sell right away (such as an entrepreneur still under a vesting period after his firm ...
5
Specifically, we have a generic conditional claim, $C$, that is a function of the diffusion process for the underlying, $S(t)$, and time $t$ so $C = C(S(t), t)$. As you pointed out, $C$ is an Ito process becuase it is a function of a stochastic process so we use Ito's Lemma to determine how the contingent claim varies as a function of the diffusion process ...
5
Here are a few recent examples:
http://stackoverflow.com/questions/4951193/find-largest-5-value-less-than-1-lowest-5-values
http://tables2graphs.com/doku.php?id=04_regression_coefficients#figure_6
http://tables2graphs.com/doku.php?id=03_descriptive_statistics#figure_5
http://chartporn.org/category/innovative/
5
There are many price driven financial data finsualization concepts are available such as candle stick stock charts. However, there is an advanced charting concept, Mano Stick which is supply & demand driven charting concept. Mano Stick is a multidimentional charting concept which is able to display price information along with volume information to show ...
5
Here's a research note devoted to pricing of CMS by means of a stochastic volatility model. The authors indicate in the Introduction that
an analysis of the coupon structure leads to the conclusion that CMS contracts are particularly sensitive to the asymptotic behavior of implied volatilities for very large strikes. Market CMS rates actually drive the ...
4
One could say that a CDS price is determined by the physical default probability and the risk premium.
The physical PD (PPD) is the actual probability of company defaulting within the given period of time. It is purely a theoretical concept as no one really knows what this probability is. We could estimate it using some models or credit ratings, but those ...
4
As a complement to chrisaycock's answer, I would also say that shorting options is useful when you want to create option strategies. Buying and shorting options on the same underlying with different strike prices allows the investor to create products with elaborate payoff which allows them to be more on a range of the underlying's price rather than on its ...
4
The common approach to temperature derivatives in their first run of popularity (in the late 1990's) was to use an Ornstein-Uhlenbeck process to describe deviations of temperature from a seasonal average. So far as I know, no major innovations have arisen since then.
Calibrating such a model is very simple, and so is valuing certain quantities such as ...
4
A swap does not require a model because its price can be derived from the yield curve without any assumptions about how the yield curve may move in the future.
The PFE however is an indication of by how much the swap's mark-to-market may move between now and a moment in the future. It is of course influenced by how volatile rates are. The more volatile ...
4
The answer to your first four questions is affirmative. Option-adjusting the spread makes an equivalence between everything theoretically possible, but the quality of results depends significantly on the quality of your interest rate model and its calibration. My personal opinion, though, is that the results need to be treated carefully because the OAS ...
4
Are there any derivatives which pay amount $a(p-b)^{2}-c$ where $p$ is the price of underling asset?
You can ask for a quote from a bank as I am sure they will create it for you. If you want to create this kind of payoff yourself, you can use the following paper from Peter Carr where he introduces the spanning formula for replicating any twice differentiable payoff.
http://www.math.nyu.edu/research/carrp/papers/pdf/twrdsfig.pdf
3
You are quite correct that there are further assumptions in the replicating argument.
Once you are assuming your equation (2), that is, that
$$
dS = S(\mu dt + \sigma dW)
$$
along with the determinism of interest rates, the rest of the replication argument necessarily follows because you have constructed a mathematical world with nothing else in it. Hence ...
3
Best approach is to model each contract separately, or to develop an equilibrium model that constrains the relationship among the various spot and futures contracts. So if you estimate you can make inferences about the other contracts.
The term structure of interest rates or covered interest parity would be examples of the latter.
3
It might not work the way you think. Note first that nobody sells options for free so at least one of your integers ($a,b,c$) is negative, meaning you will have nonzero risk of losing money on your short option leg.
More specifically, let's pretend $b \geq |c|$. Then since the value of a forward contract is the same as the call minus the put plus strike ...
3
The basic difference is that CFDs are over-the-counter products and SSF are exchange listed products.
This does not, however, hold entirely true anymore as some CFDs are listed (example, http://www.asx.com.au/products/asx-listed-cfds.htm ).
But the historical reason for CFD's origin was that over-the-counter products could provide more leverage and such ...
2
download gnuplot better then matlab , R and has almost every thing you will need It can also do everything mentioned in the other posts, and even visualize data in real time, at no cost as its open source and offers output to almost any format you want even LaTex for your thesis.
2
No, there isn't, there is no valuation model where volume plays a role, thus you can't make money from volume.
But you can buy NYSE-Euronext stocks, they will benefit from increased volume in the owned exchanges, that is if you hedge everything else that could make NYSE-Euronext stocks move.
2
The word "premium" in forward premium is more akin to risk premium than it is to option premium. In fact, the forward premium may be negative, whence it is called a forward discount. The premium/discount is merely the difference between the spot and forward prices, which may be due to interest rates and/or interest rate differentials and cost of carry ...
2
The time behavior of derivatives do not resemble that of commodity or equity towards the end of their life time. Before the expiry date of a derivative there are correlaion models that can be used in both areas, but for your question in making choices between options...
I have practical experience with stocks and sports betting, but not derivatives. ...
2
Your transition matrix $M$ has a time horizon associated with it, typically one year but sometimes 3 months or 5 years. Assume for convenience the horizon is 3 months. If it is not, you may wish to take a matrix square root to turn it into a 3 month matrix.
Now the 6 month transition probabilities are formed by multiplying the matrix with itself, $ M ...
2
You should use the ratings-based default probabilities to derive the "fair" spreads on a set of hypothetical new contracts and compare this result to the market spreads. Each could then be used independently to also derive the price for an existing CDS. There is no set way to combine the two prices, as these are two completely different and independent ...
2
Well I m affraid that there is a little bit of confusion here. Ratings are ... Ratings usually when used by notation agencies they imply a definite fixed once for all default probability (or transition matrix to some other rating) and then issuers are classified among those ratings usually by using some historical data. When using CDS spread then you get ...
2
1) Instead of asking why the portfolio is equal to the premium, ask why create it at all? I say that because it actually isn't equal to the premium, since that would just be D, and also because the actual value isn't as important as what the portfolio represents.
We form this particular portfolio because the laws of no-arbitrage guarantee it has a certain ...
2
In my mind you are simply right: you arrive at
$$
f(t,S) = S(t) - K e^{-r(T-t)}.
$$
Assume that $t=0$, so we are at the inception of the contract, then
$$
f(0,S) = S(0) - Ke^{-r T}.
$$
If you choose $K = S(0) e^{r T}$ then the contract value at inception is zero. This simply means that the fair price for the forward is given by $K= S(0) e^{r T}$ which is ...
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