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Apr
1
comment Value a structured note with Black-Scholes
No, the terminal stock price. Come on, a little work on your own does not harm you, and it supports the original intend of doing work at home (homework).
Apr
1
comment Implied Volatility Calculation
This question has been asked before: quant.stackexchange.com/questions/7761/…. Use Newton Raphson to solve for the implied volatility.
Apr
1
comment Value a structured note with Black-Scholes
@PLui, I edited my answer and added point "B". This should be plenty enough to get you to the answer.
Mar
31
comment Value a structured note with Black-Scholes
Plui, to answer your question knowledge of what drives the price of the index is essential. Unless of course this is a homework or take home exam and the lecturer asked you to assume that the payoff can be modeled via BS.
Mar
31
comment Value a structured note with Black-Scholes
@MarkJoshi, I guess I am confused then how 1000 + 2.5*(Index(T)-1100) can be the same as 2.5(Index(T)-1100). From PLui's confirmation the payout when S(T)>1100 seems to be the former payoff. Secondly I disagree with you that this can generally be valued using BS. How would you assert this is possible if you do not even know what the Index is about and whether the Index price evolution can be modeled with an identical stochastic process than what BS implies? For what its worth the index could be an interest rate.
Mar
31
comment Value a structured note with Black-Scholes
@MarkJoshi, when you say "you'll get something close to 1000", do you mean the price of the note should be close to 1000? I do not follow the rational if that is the case because unless you know the "risk free rate", dividends (or other yields, after all it is an index not a stock) as well as the volatility it would be hard to tell, imho. Also, should the payoff (if ST > 1100) not be 1000 + 2.5*(ST-1100)?
Mar
31
comment Value a structured note with Black-Scholes
Can you please first confirm that the payoff function is correct?
Mar
27
comment The use of GARCH
@lehalle, sure that would be nice to have, maybe you could write up an answer that includes all that? I am sure the community will attach a fair value to your answer and also assess a relative fair value to this answer as well.
Mar
26
comment Impact of Implied skew variations on future prices
As the paper correctly pointed out, conventional skew measures are often influenced by the volatility level and kurtosis. You can start with a simple OLS and also try what a weighted least-squares approach. You may also want to look at lead-lag effects.
Mar
25
comment How to account for correlation between strategies when they are added linearly?
well then make adjustments as I suggested in the first part of my answer; adjust weights up and downward based on pairwise correlations between strategy returns, though I would also take into account the correlation between return variations. I will edit my answer to provide more specific recommendations.
Mar
25
comment How to account for correlation between strategies when they are added linearly?
I do not fully understand your comment. M-V optimization does exactly that. It takes the return volatility of each asset into account and optimizes the weights as function of return volatility.
Mar
25
comment The use of GARCH
@lehalle, does it not directly address the question and answer it with which steps to take?
Mar
25
comment Proof oriented introductory text?
I think Shreve's 2 books are an excellent read but it would help to have some rudimentary background in measure theory. But I think all the books you recommended are pretty good. I would add to the list Rebonato's Volatility and Correlation which focuses mostly on interest rate derivatives. It is also fairly technical though less so than Shreve's books. +1
Mar
25
comment What is the fair price of this option?
I think the key point here is "perpetual".
Mar
25
comment Why the Black-Scholes formula can be used in the real world?
@vonjd, I have not voted on your answer but your comment " In a way if you priced derivatives with real world measures you would double count risk preferences because these are already included in the underlying" is factually incorrect. One should arrive at the same price of a derivative if one priced it via real-word probabilities and discount factors, given one knew them. Maybe that is why some users took issue with your answer. Just a hunch...
Mar
24
comment Rich Volatility, Poor Volatility
care to vote or comment on why any of the provided answers is not sufficient?
Mar
17
comment Rich Volatility, Poor Volatility
all I know is that those are pretty much how prop vol traders price volatility. Of course one can sell vol because its high and buy because its low (or vice versa), but I find that a losing proposition. Volatility is a financial product like everything else, there are factors that impact volatility and some of those are the volatilities of impacting fundamental factors. Take oil for instance: If implied volatility of supply disruptions, vol of inventories, and vol of other fundamental factors are low then high implied vol levels of oil are most likely mispriced.
Mar
16
comment Rich Volatility, Poor Volatility
Interesting thoughts. Though is it fair to conclude from your comments that you do not find value in determining the explanatory "variables" into vol regime shifts? For example, volatility in delivery costs or times, volatility of oil supply, changes in political volatility in regions that impact oil prices generally, volatility in demand for oil end-products, volatility in weather conditions, and the like?
Mar
13
comment Where can I find literature (books, articles, etc.) about basic HFT / arbitrage strategies?
Let's not make this personal please. I read through your answer and I just did not feel it addresses the question and I provided a detailed explanation of my rational. Nothing personal.
Feb
25
comment Why implied volatility is less for the back month option even though the back month option is more expensive
quant.stackexchange.com/questions/4936/…, and the fact that an option price is not only a function of implied volatility.