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Mar
24
comment List of financial derivatives Ito's Lemma does not apply
American, ok. Can you explain why prices cannot be following a process derived through Ito? It is not clear to me which underlying Ito assumption is broken by the early exercise
Mar
23
comment List of financial derivatives Ito's Lemma does not apply
@pbr142 There is a version of the Ito process for the discontinuous stochastic processes. Yes the question is about the price of a derivative, not the final payoff. The discontinuity in the final payoff does not limit the application of Ito derivatives to figure out the price of an option.
Mar
23
comment List of financial derivatives Ito's Lemma does not apply
where $df(X_t)$ is not following Ito diffusion process
Mar
22
comment List of financial derivatives Ito's Lemma does not apply
Please give an example real trade that we cannot use Ito. Here I believe one considers the value of the derivative from initiation to final time point. Thus discontinuity at maturity does not make application of Ito inappropriate
Mar
8
comment Which interest rate model for which product
It is known that once you start to estimate the dynamics more than weeks at most a month, any of these models will fail. Thus even though the risk management portfolio is the most complicated beast, practical applications of LMMs, and SABRs are limited.
Mar
8
comment Which interest rate model for which product
The model to use depends on the purpose of the pricing. If you're long and short caps at different maturities, you need a model that captures the term structure of volatilities. If you are trading out of money vols, then you need a model that captures the volatility vs strike dynamics. In reality the risk management applies to the whole portfolio, thus you can say models should be most complicated to capture the dynamics between the different factors. Though there is a trade-off of the model risk.
Mar
7
comment How to prove that markets are incomplete under the Stochastic Volatility model?
The volatility change of $dS$ does not make process of $S$ non martingale. It needs to add a drift to $dS$. I think you need to clarify that point
Mar
5
comment measuring the performance of round-trips on stocks
what is your funding cost?
Mar
4
comment How to calculate modeled asset volatility by industry factor?
Is this question about GCorr? If so, yes it uses a factor model approach. moodysanalytics.com/~/media/Insight/Quantitative-Research/…
Mar
3
comment Linear-Boundary Crossing Problem for Brownian Motion
Wierd that you are posting links and saying my answer with links is not good cause links die :)
Mar
3
comment Pre-trade evaluation and risk assessment of option trading strategies (in market practice)
Why cant you backtest your strategy, by taking a window of stock prices, implied vols, and run it. This is basically historical VaR approach, though you can age your position to incorporate the time effect. If the horizon is long, you will need stock and vol evolution models through time horizon.
Mar
3
comment Pre-trade evaluation and risk assessment of option trading strategies (in market practice)
I feel like his mentioned strategy 1 and 3 are the same, though you understood it as a long call. Patrick can you clarify your long call strategy.
Feb
22
comment why is the BNS model the way it is
why would you need to model the jump in vol to impact equity same level? You have another random process to move the equities. If you have to random processes that have similar effects, you will have a calibration nightmare
Nov
13
comment Version of Girsanov theorem with changing volatility
Can you provide a reference for your comment?