# Tag Info

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To expand on pbr142, If the implied volatility (vis. Black & Scholes) is persistently higher for short-expiry contracts away from the money, the problem is the model, not the thing that's modeled. The price of a contract at a given point in time is the "correct" price at that point in time (or we should move this to philosophy.stackexchange.com). So ...

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You have to remember that implied volatility comes from a "wrong" model to give the right answer. Option prices are determined by supply and demand (subject to a few arbitrage bounds). A higher implied volatility for OTM/ITM options relative to ATM options simply means that the prices of these options are higher than the Black-Scholes model would imply ...

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As alexis0587 said, with any gross producer margin (GPM) spread, you capture the differential of outputs less inputs since that reflects your profit for running the plant: $$\pi = p_e-p_{ng}-p_h-\kappa$$ where $\pi$ denotes profit, $p_e$ electricity price, $p_{ng}$ energy-equivalent factor adjusted natural gas price, $p_h$ equivalent factor adjusted ...

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Anyone can give us an example with Interest Rates Derivative?

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When you have a power plant, your gain (financial) is Power Price - coef1 * Gas Price - coef2 * CO2 Price - other cost. So if you want to secure your supply, you have to be Long Gas and CO2 and Short Power. Physical commo is the opposite, you are short gas and long Power (when the Power price rise, you earn more money). Financial strategies must be ...

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Levered ETFs have the behavior similar to power contracts, but there aren't any listed options. Some banks should be able to sell you OTC contracts, although I doubt you can do any arbitrage like trade if you are hoping to do - the bid and ask will kill you!

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They are not referring to any implied volatility but actual volatility, i.e. statistical standard deviation. The price volatility is the annualized standard deviation of bond price changes and the yield volatility the annualized standard deviation of bond yield changes. These quantities are usually estimated using a historical estimator. If you have n ...

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Answering my own question: All the indicated numbers as obtained from ICAP need to be divided by 100, as they are percentages The OptionletStripper1 takes an IborIndex, which should have a tenor equal to 1Y. I had set it to 6M, and that seemed to cause problems Ouch!

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I believe your example describes the payoff of a simple spread option. Some may argue that in reality this spread option has zero strike: $$(S_T(\omega) - K_T(\omega)-0)^+$$ Which leads us to the question: What exactly strike is anyway? Is it uniquely identifiable term in each payoff function? No It isn't.

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Asian options: strike is average of underlying over tenor. Underlying is stochastic. Options with kock-ins/knock-outs: Underlying is stochastic and may cross the kock threshold as it evolves. Option value depends on this cross or lack thereof (boolean). Options on Options, too. Motivations for Asian options you can google. Kock-ins and knock-outs ...

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