1
$\begingroup$

Often I ask myself whether it makes sense to calculate the price of a Call at t+1 supposing for example that underlying asset does no move i.e. $S_{t+1} = S_{t}$ and $\sigma$ has changed.

Kind of: $C_{t+1} = f(S_{t}, r, \sigma_{t+1}, K, T)$, $C_{t+2} = f(S_{t}, r, \sigma_{t+2}, K, T)$ etc.

Will that pricing of call in future periods bring any practical value? Where can we use that prices?

I have a few ideas:

  • Possibly as basically that calculation is a prediction of Vega, as $vega = \frac{C_{t+1}-C_{t}}{\sigma_{t+1}-\sigma_{t}}$ it can be used for hedging (not sure about this statement)
  • My professor of trading told me something like "it is used in stress testing" many years ago (what did he talk about?)
Improve this question
$\endgroup$
3
  • 2
    $\begingroup$ Pricing derivatives at future times is fundamental for pricing valuation adjustments (VA) such as Credit VA, Debit VA, Funding VA, etc. $\endgroup$
    – Daneel Olivaw
    Aug 8, 2018 at 12:19
  • 1
    $\begingroup$ Overnight risk reports, among other things... I would say: whatever you do in finance, it is important to ask how that changes time-wise and cross-section-wise. $\endgroup$
    – stans
    Aug 8, 2018 at 12:36
  • $\begingroup$ @stans what do you mean by "cross-section wise"? $\endgroup$
    – Maksym Bondarenko
    Aug 9, 2018 at 18:07

0

Reset to default

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge that you have read and understand our privacy policy and code of conduct.