# Tag Info

5

You are missing the futures basis and roll cost. Futures expire, and need to be rolled into the new expiry. The basis is not static and can vary considerably, depending on the specific underlying and contract. Quants may have a hard time to appreciate this but the basis is not at all fully quantifiable at all times: It can hugely vary entirely due to shifts ...

3

This is, of course, a very old play. The main thing that gets in the way of trading it is that puts are rarely available in a quantity that matches typical credit instrument notionals. Here's a decent paper by Peter Carr on the topic, see equation (4) and surrounding.

3

Constructing the right supermartingale is the key step. Consider the process $$X_t := \underset{Q \in \mathbb{P}}{\text{esssup}} \ E_Q \left[ H | \mathcal{F}_t \right].$$ This process $X$ is well-defined, since $\underset{Q \in \mathbb{P}}{\sup} E_Q [H] < \infty$. One can show that $X_t$ is a supermartingale under every $Q$ in $\mathbb{P}$. This ...

3

stock price * volatility * 0.4 * sqt(T), where T denotes time to expiration in years and 0.4 is coming from sqt(1/(2*pi)). The simplifying assumption here is (and that is very important and you will most likely be asked to state the assumptions should such question be asked in the interview): strike price equals underlying asset price AND asset prices are ...

3

You can mitigate your fx exposure (hedge fx risk by engaging in an fixed/fixed fx swap. Let's setup an example: You want to invest in two bonds, one EUR denominated and one USD denominated bond. Each bond pays semi-annual coupons (at the same dates for simplicity purposes) for the next two years. You are a US-based investor and thus want to earn returns on ...

3

This is usually called Pin Risk. It's difficult because there is a high degree of uncertainty regarding the whether the options you sold are exercised or not. If you don't hedge, your short options could be exercised and you are left with risky net short position in the underlying. If you hedge and your short options are not exercised, then you have a long ...

3

You discuss the behavior of stock prices after an earnings announcement. There is a significant amount of academic research on this topic (called post-earnings-announcement drift). It basically finds that stock prices tend to move sharply initially, but continue to gradually follow in the same direction as the initial move for several weeks thereafter. I'm ...

3

I just thought it is worth mentioning that the skew of the underlier implied by traded option prices and the options implied-volatility skew are indeed related by no-arb relation. The point is that you can integrate implied variance over the strike prices to get the unconditional implied variance (and hence volatility) of the underlier and the skewness of ...

2

XVIX volume today was 11k shares. Back month VIX futures volume is almost 2k contracts in Mar13 and higher from there as you get nearer in time. Given the multiplier in the futures I don't see the problem, esp. now that the back month bid/ask spreads are usually one or two ticks wide. If the ETN product did really take off, UBS could do what Credit Suisse ...

1

You would simply hedge with a floating rate leg. That is the whole idea of swaps though. A price taker is paying fixed and receiving floating then such price taker usually is hedging the risk of interest rates increasing, meaning he is not concerned with the risk of decreasing rates. Generally such participant has floating rate liabilities. Let's say the ...

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So just to clear the payoff, it's an option on realized volatility (not variance) conditional on the stock? Are you sure it's not a conditional variance swap or a knock-in variance swap? (a) I hope you are doing it in some sort of index, cause I'd hate to hedge this in single stock. (b) In an index this would be very costly (the skew would make the ...

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Skew "arbitrage" is a pretty broad term. When you are trading the skew, there are 3 principal risks (or sources of P&L, if you will): (a) the actual change in the slope of the skew in the implied space. e.g. if you are trading 95% strike against 105% strike and your underlying stays in place, all of your instantaneous P&L would be due to the changes ...

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