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7

The payoff $\max\{a\cdot S_t - K,0\}$ can be re-written as $a\cdot\max\{S_t - K/a,0\}$. Therefore it can be priced as a regular call option with the strike $K/a$.


4

Liquidity Since this is an asset class which is so tightly coupled with interest rates - it makes good products for clients inherently complex. It also makes good sense to make wider markets for more exotic products than the plain vanilla ones - in which razor-thin spreads rule (and trading huge notionals is not everyone's cup of tea)


2

I know this may sound extreme, but in my experience for these kind of payoffs you do need a LMM and possibly with at least 8 factors. There is no shortcut unfortunately, even a 3 factor gaussian model, which you can use to price faster using trees, will not capture the possible dynamics of the curve implicit in an 8 factor LMM. Just my modest opinion ...


2

It is possible to price CRAs using the LMM using a Brownian bridge technique. You simulate to each coupon date and then infer the expectation of the coupon given the values of the rates at the start and end of the accrual period. http://ssrn.com/abstract=1461285 Interpolation Schemes in the Displaced-Diffusion LIBOR Market Model and the Efficient Pricing ...


2

As I understand it, the currency derivatives are meant for customers to hedge actual exposure. A foreign distributor obviously has exchange-rate risk, but it's hard to say who actually has risk exposure to the S&P 500. (There's the effect of beta, of course, but it's pretty rare for someone to have tangible---not just CAPM---exposure to the S&P. ...


2

From Wilmott: Trade capture is the process of booking (or capturing) the trade into the systems used within a financial organisation. This may sometimes have to happen multiple times depending on the complexity of the trades and the ability of the systems to be able to capture the economic, non-economic and static details surrounding the deal. ...


2

Some more concrete sources on Barrier option in the B&S setting and PDEs PDE methods for pricing barrier options (quite technical) Pricing Europ ean Barrier Options More of a general remark to PDE approaches in finance Ilya as far as I know the literature on that topic is quite limited. Solving a PDE means solving a PDE - it does not matter in ...


1

Some techniques I can think of include Use a brownian bridge to get a crossing probability for points near the boundary Use implicit stepping in your PDE solver (which increases smoothness) as opposed to explicit stepping (which "rings" near discontinuities) Employ control variates, by using the same grid to price related instruments having easy analytic ...


1

The easiest way is to use single-expiry volatility that you would get from your volatility surface. It is usually good enough for government work (e.g. to get a sense if you are getting raped by a dealer or to understand your vega risk). A better way is to use local volatility model and the whole volatility surface up to the date of expiry. There is also a ...


1

I don't know if these are the most commonly traded or most popular (for your definition of popular) but here are a few exotic products that I recall being supported by the flagship product at my former employers. Exotic Options: Asian - Strike price is dependant on average price throughout the deal, not just at expiry Bermudan - So called because it's ...


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Posting this question to a LinkedIn discussion group solicited the following additional answers: The underlying is relatively well understood and simple in a pricing sense. This allows you to put a complex (exotic) payoff on top. The vast majority of FX spot volumes are spread among a small group of G-7 currencies, unlike equities or other markets where ...


1

I've priced similar animals with a naive N-factor method, adding a convexity adjustment for the swap rates. But I'm not sure this is very orthodox...



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