# Tag Info

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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

This is known as a 'crossed' book, the exchange will attempt to uncross the book at the price at which the maximum amount of volume can trade. In your example at the price of 42 there's only 3533 amount of buying quantity, and there are more than enough sellers to cover this. At a price of 40, there's now 3533+425 buying quantity willing to trade, and still ...

3

It depends on the exact structure. E.g., a butterfly can be bought or sold and every market participant understands which individual options are bought or sold given knowledge of the agreed spot level and distance of the wing from spot in regards to agreed strikes. Please note that a butterfly can be structured as a combination of calls but also through ...

3

As @babelproofreader mentioned, I recently blogged about the Roll model (see the original paper), which provides a very simple method for inferring the bid/ask spread based on trade prices. In short, you can estimate the cost using using the covariance: $c = \sqrt{\gamma_1}$. Where $\gamma_1$ is the $Cov(r_t, r_{t-1})$. (The R code is provided in my post). ...

2

I suggest searching all the possibilities using Excel. Code the option pricing formulas into VBA functions (if you have not done so already) with cell to hold option strikes and quantities, and then set up your price scenarios for a grid of 1% moves in the underlying. You have now reproduced the information contained in your Bloomberg plots pictured above....

2

Net the vegas of the individual options in the spread. Inherently, the closer together the strikes, in the spread are, the less sensitive to changes in implied vol the spread is. The opposite is true for wider spreads. Technically, the wider the spread the more it follows the dynamics of the skew itself, depending on where the spread is relative to at-...

2

When speaking with quants, I call such things Boundary Conditions. With traders I tend to use Terms or Features.

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First, I assume that when you say: And I was no wondering if it would be a good idea to place bid/ask offers instead of limit orders... You mean that you are going to be placing non-marketable limit orders inside the posted bid/ask spread; whereas before you were sending marketable limit orders that crossed the spread. You didn't mention the type of ...

2

if they are stocks, this problem is called pricing a Margrabe option and it is generally solved by change of numeraire. Take $S_2$ to be the numeraire. Then the value of the option is $$S_2(0) \mathbb{E}_{S_2}( (S_1(T)/S_2(T)-1)_+)$$ where the expectation is taken in the measure that has $S_1/S_2$ as a martingale. Since it's a martingale and log-normal at ...

2

This spread can't be statically synthesized. However you can synthesize it dynamically by trading in the underlying contracts. You would first value the option using standard theory (this involves solving a two-dimensional PDE, or using Monte Carlo) to get a price $V(F_1,F_2)$ in terms of the prices of the underlying futures contracts. Then the holdings in ...

2

You are referring to the Penny Pilot Program. Only options whose premiums are quoted at a price less than \$3 may be eligible for penny increments, except for IWM, QQQ, and SPY, which are always quoted in pennies. The list of permitted classes doesn't seem to come from specific volume criteria. Instead, the SEC and the exchanges together roll-out names in ... 2 The intuition behind the statement "if correlation increases, the spread of a CDO junior tranche decreases" is as follows: If correlation increases, more probability mass of the default distribution is moving to the tails. The risk of joint default increases, but at the same time the chance of joint survivals increases. So the higher correlation, the ... 1 TED spread 6mo chg = TED Spread{t} - TED Spread{t-6}, t := month 1 Happy holidays to you too. The difference is that in one case you hold the bond to maturity (carry) with the Cupon Rate. And the expected return is the YTM (yield) seen on the secondary market trades + the spread. That's it. 1 for synthetic cdo you could have a look at this paper - http://home.gwu.edu/~sagca/JAI.pdf. as for equity tranche, i understand that it receives residual cashflow i.e. remainings after paying all senior tranches. 1 In your scenario, the main factor behind the spread would be the forward repo rate implied by the term repo rates on the ctd, one termed to the delivery date of the front contract, the other termed to the back contract. In the current rate environment this will have little to do with the term structure of mm rates. Instead, any difference between the repos ... 1 First some remarks in a model agnostic sense. Credit spread is actually thought to be significantly smaller than the actual one (some even say about 1/3 only, for corporates Longstaff 2005 reports the range 5%-25% for the default component), as there are many other factors such as liquidity. For PDs it might be slightly better to use CDS spreads. In any case ... 1 Unless the counterparty specifically bought the swap, then at inception the swap had a 0 value, i.e. the spread is that value which equates the two legs. Of course, it's usually bumped up (bank receiving) or down (bank paying) as the trader's profit. 1 Yes, and no. First large orders often get smaller spreads than small orders, because of efficiency gains for the market-maker. However, large orders also tend to have larger spreads. The reason for this is that large orders may contain additional information about the future price which is at the expense of the market-maker in the interdealer market. But ... 1 If you are after treasuries, you can check http://www.newyorkfed.org/research/staff_reports/sr381.pdf which discusses trade impact on BrokerTec. If you are after equities, the literature is enormous, you can pretty much google for "trade impact limit order book" or smth similar. In practice, it's an empirical approach: you put all the factors, that seem ... 1 You should turn to market microstructure research. Large and frequent trades can temporarily increase the spread and observed transaction price. Additionaly, trades done near the release of new information ( macro news, firms news,...) most likely need to overcome larger spreads. 1 The math is actually simpler than what you proposed. Z-Spread is always computed as the parallel shift in a zero curve required so as to reprice the cash flows to a bond's cash flows; i.e., you solve for the$s$in $$P + AI = \sum_{i=1}^N c_i \cdot d(t_i) \cdot e^{-t_i \times s}$$ In the multi-curve world, you simply compute both the LIBOR OAS and OIS OAS ... 1 if you let the implied vol depend on K you get two terms the first is$N(d_2) $but you get a correction term which is the slope times the vega $$\frac{\partial C}{\partial \sigma} \frac{\partial \sigma}{\partial K}.$$ (see eg my book) 1 Do you know the concept of duration? It is an approximation of how much the price of the bond changes if the interest rate (appropriate for the market in which the bond trades) changes. This is the interest rate is used to discount cash flows. It is common to all the bonds in the same market (e.g. German govis). For various reasons (liquidity, credit risk, .... 1 I'm still not entirely certain exactly is the question you want answered. If you are you asking is "uninformed" flow more valuable than "informed" flow, then the answer is an emphatic yes otherwise funds like Citadel wouldn't pay so much for it. See here for details The only issue to consider is that will you be able to get a piece of the "uninformed" ... 1 this is how i would explain your approximation. First start with notation: Define$K_{atm}$to be the atm strike. Define$\Delta K := K2 - K1$where$K2 > K_{atm} > K1$. This corresponds to$\Delta K = StrD$in your notation. Now assume a black scholes world, within this world we can approximate the Call and Put price of an atm option with:$C_{atm}...

1

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There is no such thing as a "proper" interpolation of CDS spreads. The only criterium your interpolation must obey is the absence of arbitrage. Note that, assuming that $spread(3M) < spread(6M)$, $spread(4M)$ can take any value between $spread(3M)$ and $spread(6M)$ without creating an arbitrage opportunity (actually it can be even slightly less than \$...

1

You may wish to consider this process a little more generally. That is to say, you are defining a cohort of comparable bonds as 23-year A- rated bonds. Bloomberg doesn't supply a long-dated A- curve, so no matter how you approach this, you will effectively be modeling this bond spread against others in its cohort. I suggest redefining the cohort to be 20-...

1

DV01 is your cash exposure to a BP change. Once you have €45 and €25 as DV01s for Bobl and Euribor respectively, you simply divide the two to figure out your DV01 neutral position sizes. In my particular example buy 180 Euribors to sell 100 Bobls for no raw duration risk. You can also choose weighing schemes that account for varying volatilities and ...

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