Questions tagged [black-scholes]
Black-Scholes is a mathematical model used for pricing options.
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Option Extrinsic value representation
The typical representation of extrinsic value of an option is the following:
Is the gaussian the real representation of extrinsic value derived from Black and Scholes?
Should it be a lognormal?
...
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B&S pricing of option with convex transformation
Assuming B&S world, is it possible to price an (European) option on a general transformation $f(\cdot)$ of $X$? What kind of assumptions should we make on $f$? Is convexity sufficient to find some ...
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Are Black-Scholes Greeks bounded?
For time to maturity greater than zero, has it been proved somewhere that the Black-Scholes greeks
$$
\frac{\partial^n BS}{\partial x^n}
$$
are bounded, where $x := \log S$ and $S$ is the current spot ...
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Generate payoff matrix of multiple BSM assets
I have some troubles generating a random one-step BSM market model that is arbitrage-free.
Concretely, the BSM market model in one time step is just a payoff matrix of $N$ assets and $K$ events, so ...
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Compute delta from the option price without vol input [closed]
Is it even possible without resorting to gradient descent methods? I can't see any way to algebraically reason around the cumulative normal functions involved in d1 and d2.
Any ideas?
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Boundary condition issues for Black-Scholes PDE using finite-differences
I have been implementing an, in my opinion, interesting finite difference method (Runge-Kutta-Legendre of second order) to price American options in the standard Black-Scholes model (see "...
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Calibrate the SABR model to the implied volatility surface
I'm currently trying to calibrate the SABR model. The question I have is that when I consider papers and other websites I only come across cases where the SABR parameters are calibrated to the implied ...
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Negative-gamma delta hedging (for a call option writer): how will the stock price affect the portfolio profit?
Suppose a (European) call option writer is hedging their risk by taking a long position in stocks (holding $\delta_C$ shares). The value of the portfolio is $V(S)=\delta_CS-C$. Then is the gamma of ...
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Does it matter that Bachelier IV differs from BS IV for a given option price?
In one sense, it’s just an accounting convention, so it doesn't matter. In another sense, the implied volatility can be interpreted as the minimum realised volatility which implies that your option ...
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Deriving strike from Delta
According to the following thread:
How can I calculate the strike price or implied volatility from a given delta?
To back out some strike given some Delta, you simply use realized vol (plus a few ...
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Computing Delta-Hedged Option Returns
I was reading some papers on delta-hedged option returns and came across an intriguing paper that I found quite interesting.
However, I was a bit confused on the authors' methodology of computing ...
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Best Way To Compute the Volatility Risk Premium
I'm trying to come up with a measure for the volatility risk premium (VRP) for a strategy I want to implement, but I'm not entirely sure how to proceed. My situation is as follows.
The underlying is ...
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I am struggling to prove how when volatility tends to infinity, call option is equal to St and pt option = Ke-r(T-t) [duplicate]
I know how to prove when volatility tends to infinity but i am struggling to prove this. Can anone help?
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The Wikipedia formulas for Vanna differ by a factor of 100x, why is that?
For a given:
Stock price ${\displaystyle S\,}$
Strike price ${\displaystyle K\,}$
Risk-free rate ${\displaystyle r\,}$
Annual dividend yield ${\displaystyle q\,}$
Time to maturity ${\displaystyle \...
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Does the put-call-parity hold for the Heston model? [closed]
My question is quite simple: Does the Put-Call-Parity hold for the Heston model? My textbook handels the Black-Scholes model with the Put-Call-Parity being
$$p_t = Ke^{-r(T-t)}+c_t-S_t.$$
However, it ...
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Is the market price of an asset always lower than the expected discounted value under the REAL WORLD measure?
The risk neutral measure is often said to reflect the risk aversion of investors. So intuitively, I would think that an asset's expected discounted value should be lower under the risk neutral measure ...
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How to apply the Spanning Formula (Carr-Madan) on European Call-option?
In the paper Optimal positioning in derivative
securities (Carr & Madan, 2000) the so-called "Spanning Formula" for replicating payoffs is presented in section 2.1 as equation (1). It ...
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Option Chain Simulator Using Historical Index Future data, VIX, Implied volatility for Calculation ( Pls Review the Idea & give your suggestions )
Recently I started trading in options, for Learning purpose I am Planning to Create old European Option chain like previous week or last year particular entire week Weekly expire option chain with the ...
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What is the P-probability of an unhedged call-arbitrage to lose money at expiration
Assume that the Risk Neutral Price (under the $\mathbb{Q}$-measure) of an European Call Option with expiration date $T$ has a price of $F(S_0,0)$ at time $t=0$ in the single asset Black-Scholes model ...
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Black-Scholes differential equation rewritten [closed]
I have seen that the Black-Scholes equation
$$\frac{\partial V}{\partial t}+\frac{1}{2}\sigma^2S^2\frac{\partial^2 V}{\partial S^2}+
rS\frac{\partial V}{\partial S}-rV=0$$
can also be written in the ...
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Pricing for basic option strategies [closed]
If I am trying to price a strategy, say for example a call spread where we are long a call, strike L and short a call strike M, would the pricing formula simply be the Black-Sholes price for the Call ...
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Analytical evaluation of the following caplet-type product under lognormal assumptions
Let $n \geq 2$, and consider a tenor discretization: $0 = T_{0} < T_{1} < ... < T_{n}$ and associated forward rates evaluated at time $t$, as $L_{i}(t):=L(T_{i},T_{i+1};t)$ for any $i = 0,...,...
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Preprint investigating Black–Scholes formula correctness
A recent preprint appeared on arXiv. It questions the appropriateness of the Black–Scholes formula for the price of a European call option in the context of already assuming the Black–Scholes model ...
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Black Scholes PDE discretization
We can solve the Black Scholes PDE by numerical methods like Euler
\begin{equation}
\frac{\partial V}{\partial t} + rS\frac{\partial V}{\partial S}+\frac{1}{2} \sigma^2 S^2\frac{\partial^2 V}{\partial ...
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Black Scholes PDE in forward log space
In BS world, we have the stock process in log space $dS_t=(r-\frac{1}{2}\sigma^2)dt+\sigma dW$. Let's say we want to price $f(t,x)=\mathbb{E}_{t,x}[h(S(T)]$. Using Feynman-kac, we get
\begin{equation}
...
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Why is the price of an ATM straddle not the same as the "dollar move" from implied volatility?
Knowing that implied volatility represents an annualized +/-1 Standard Deviation range of the stock price, why does the price of an ATM straddle differ from this? Also for simplicity, no rates, no ...
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Extrinsic value larger than strike distance [closed]
Let a stock trade at 50\$. Would it be possible for a call at the 55\$ Strike to trade a a price greater than 5$?
I'm pretty sure that there has to be an arbitrage opportunity, I'm just not seeing it.
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Finding the distribution of $I(T_{1},T_{n})$ under an appropriate measure if the forwards are lognormal? [duplicate]
My question follows beneath the "lengthy" setting I describe:
Given a tenor discretization $0 = T_{0}< ... < T_{n} =T$,
and under the assumption that under $\mathbb P$, for all $i = 1,....
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Why is the argument for the accumulated price process allowed to be negative in asian options?
Consider an Asian call option on some underlying with price process $S$ which follows a geometric Brownian motion, and accumulated price process $Y$, where
$Y_t = \int_{0}^{t}S_u du$. Let $v$ be the ...
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Realizing the same PnL as Gamma Vs Vega
Consider a delta hedged option postion.
Futhermore assume that I can perfectly forecast realized volatility over the life of the option.
Vol I buy the option at = Implied Vol (IV)
Realized volatility ...
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Where does 1/2 in Fourier Transform method of pricing options come from?
I am reading Jianwe Zhu's Applications of Fourier Transform to Smile Modeling. On page 26, the author is describing how to use the Fourier tranform to price vanilla European call options. If $f_j$ is ...
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How does $(d_2/\sigma) = (1-d_1)$ while deriving the Vanna Formula from BSM? [closed]
Just realized there was a quant finance board, so I figured I'd post it here instead.
I'm trying to derive Vanna from the Black-Scholes Model (BSM) equation, but had a hook up on one of the ...
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Asian option analytical approximation
I'm trying to approximate the price of an Asian option via the Black-Scholes formula by considering the discrete arithmetic average as a log-normal distribution.
$$
A_{T}(n):=\frac{1}{n} \sum_{i=1}^{n}...
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Why Do I Need to Scale Options Vega w.r.t T (Time till Expiration)
In the book that I am using, it said that I need scale vega according time with this formula: $\sqrt{90/T}$ to get the weight of the vega w.r.t t. The reasoning it offered is as follows:
"...
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How is VaR calculated for forward contracts accounting for European put options?
My initial idea is to create profit and loss using an equation like this:
\begin{align}
P\&L = & \text{European Put P&L} + \text{Forward P&L}\\
P\&L = & [(K-S_T)^+...
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In the Black-Scholes model with stochastic interest rates, what are the 3 assets used to compute measures?
Suppose I have a model with 2 primary assets, a stock $S$ and a short rate.
The stock will be driven by a Brownian motion $W_1$. The short rate will be random and will be driven by a Brownian motion $...
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how does margin affect the Option Price when Selling an Option
Currently I'm thinking the effect of margin. When selling an option, you need to pay margin everyday and mark to market. In most exchanges, margin is overcollateralized. But when buying a option, you ...
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What adjustments need to be made before a Monte-Carlo simulation can be applied for the exotic option $(L_{\text{domestic}}-L_{\text{foreign}})^{+}$
I just want to reassure myself that I understand why Monte-Carlo is the appropriate tool in computing the fair value prices for different options. Let's say we have a Tenor discretization $T_{0}=0<...
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hedge with implied volatility, PnL formula
Notations are consistent with this answer.
Selling and delta hedging the option $V^i$ using the implied volatility $\sigma_i$ while the actual volatility of the underlying asset is $\sigma_r$. Then ...
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Pricing a contract
I'm currently trying to price some different kinds of contracts. I'm stuck on this following exercise, which I can't seems to find a good solution for. The following is assumed:
We are in a standard ...
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Why the Esscher transform is the right transform for pricing formula?
A Wiener process has infinitely many states of the world at any time step. Does that not mean that there are infinitely many EMM's for any model that uses the Wiener process?
But then if there is only ...
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Integral of brownian increments
I'm stuck at a problem and I'm not sure on how to proceed. My question is how would one go about and integrate the following
$$\sigma\int_{t}^{T}\mathrm{e}^{a\cdot u}\cdot (W_{u}-W_{t})du.$$
I've been ...
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Using the risk neutral version of the First Fundamental Theorem of Asset Pricing to derive a partial differential equation
I have to use the risk neutral version of the First Fundamental Theorem of Asset Pricing to
derive a partial differential equation (PDE) that the price/value process, $V_t = F(t,S_t)$,
of a self-...
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Issues with calculating IV with options bar data
I am currently working with some options OHLC data (30 minute bars) from IBKR for a range of strike prices, maturities and for both calls/puts. For each bar, I am trying to back out the IV (crudely ...
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Any book which is intro to PDEs but prioritises techniques useful for solving Black-Scholes?
Summary:
Can you recommend any book which is:
Intro/first course in PDEs
Covers solution methods useful for Black-Scholes model?
Background
I have just started learning about PDEs (after studying ...
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Under put call parity shouldnt the implied volatility for call and put for same strike and maturity be the same?
If all of the other inputs into black scholes (divs/rates/time to maturity/strick/current price/etc) are all the same between two pairs of calls/put contracts on the same security, shouldn't the ...
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Discrete geometric asian option call price formula
I am looking to derive the call price of an asian option of the form
$$\max\{A_T - K, 0\}$$
with
$$A_T = \left(\prod_{i=1}^nS_{t_i}\right)^\frac{1}{n}$$
which has price under $\mathbb{Q}$
$$e^{-rT}[...
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For single barrier options, why is a plot of gamma so scattered compared to other greeks?
Is this to be expected or is there something wrong with the model?
I am getting scattered gamma plots for all types of barriers like U&O, D&I, etc
However a basic vanilla options has a smooth ...
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Volatility of American vs European Stock option return
Let's say that I hold an American Call Option (ACO) and an European Call Option (ECO) in my portfolio on the same underlying, with same strike price and same maturity date. Given that I hold both ...
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Black Scholes derivation: Why treat Delta as a constant?
In the derivation of the Black-Scholes equation, it is argued (e.g. in the original paper and in Hull) that
$$dV(S_t, t)=(…)dt + \frac{\partial V}{\partial S} dS_t,$$
where $V(S_t, t)$ is the value at ...
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