Questions tagged [derivatives]
A financial contract whose payoff is linked to the evolution of an underlying security.
392
questions
2
votes
0answers
45 views
What makes modeling interest rate derivatives very difficult compared to equity derivatives?
I understand while equity derivatives require the modelling of stock price at expiry, interest rate derivatives typically require modeling both the expiry and tenor, thus increasing the dimensionality ...
-5
votes
1answer
63 views
Derive the Itô process S_t in the interval [closed]
I need some help with deriving a certain SDE. The SDE is as follows:
ππ=ln(π)ππ‘+ln(π)ππ§
The Ito process has to be derived for S_t in the interval (t_1,t_2)
Thanks!
-1
votes
2answers
45 views
Equations to Test of local linearity of a derivative security [closed]
Friends any hint as to why is this set of equations a test of linearity of a derivative security?
From Taleb - Dynamic Hedging pg. 11
,, Derivatives are not always ...
1
vote
1answer
69 views
Rolling to a non-front month future contract?
I hedge my US positions with M6B, a GBP/USD future.
Every time I roll my contracts, I ask myself "why is there so little liquidity beyond the next three months?" Surely there are people that ...
2
votes
0answers
27 views
CMS Convexity adjustment with negative interest rates
I need to price bonds with CMS-linked coupons. In order to determine the convexity adjustment to apply to the forward rates, I would use the formula that appears in Hull's Futures, Options and other ...
2
votes
3answers
143 views
options on futures
For options on futures in the black model, I do remember that $F$ appearing in the formula must be the forward at maturity of the option (and not the future price).
So, say we have a future maturing ...
0
votes
2answers
84 views
Derivatives to short municipal bonds based on cryptocurrency [closed]
Can you short municipal bonds with a cryptocurrency derivative? This is notoriously impractical in traditional finance, but there could be a crypto-based derivative designed around it. Is this a thing?...
0
votes
1answer
76 views
Calculate zero recovery discount curve from bond yields and cds prices?
Clarifying the below:
Given the prices of bonds that are not trading in distress as yet (so yields are meaningful), and data on the CDS spreads, Iβve been looking for some approaches for estimating a ...
0
votes
0answers
74 views
What does it mean In FX trading you using a T/N swap to avoid physical delivery of the currency? [duplicate]
I understand you use T/N swaps to rollover FX positions and so avoid physical delivery but I dont quite get how this happens in reality. For example, if I am long EURUSD and need to deliver/sell USD ...
3
votes
1answer
110 views
Fixed Income Index, ETF Replication
Can anyone please explain how fixed income index are actually replicated (in an ETF) by asset managers ? I looked online, everyone says they do sampling (stratified sampling) which makes sense but I ...
1
vote
0answers
40 views
How To Create Daily Leverage?
After doing some analysis on daily leveraged funds one of the biggest risk factors I find is regulatory risk. My goal is to have a risk parity portfolio with daily leveraged funds but if some of these ...
1
vote
1answer
74 views
Swaption decomposition - forward options and option on options
I am following through the book "An Introduction to Financial Derivatives" by Salih Neftci. According to the book, a swap can be decomposed into cash flows from forwards and options.
I am ...
0
votes
0answers
41 views
Can you explain grid(or lattice) for option pricing, and explicit and implicit finite difference methods in a simple way?
I am a student learning about option pricing. I understand the concept of binomial trees, trinomial trees, black scholes and monte carlo simulation for option pricing. However, I've just had a lecture ...
0
votes
0answers
25 views
Quantifying the difference between 2 Foward Curves
I'd like to quantify the difference between 2 Foward Curves. In particular, I'd like to get a single metric which represents the magnitude of change between curve A and curve B. I'd like to plot this ...
3
votes
0answers
94 views
Are rough stochastic volatility models used on the street for equity derivatives ? (2020)
I'm building out some stochastic vol models for pricing exotic equity derivatives. What's the state of the art on the street?
2
votes
1answer
49 views
Trying to understand brazil derivatives market
I am trying to get a better understanding of brazil's market, specially derivs.
I know they have certain instruments such as "Convertibility" (based on the yields spread between onshore and ...
0
votes
1answer
63 views
Longstaff-Schwartz for any optimal stopping
Let's say I have the stock of General Motors and I assume some fancy model for the price of this stock and I have to sell it within a month. Can I use Longstaff-Schwartz algorithm to determine the ...
2
votes
1answer
90 views
Greeks for Futures [closed]
Is there some general result on the sensitivity of futures price to its maturity? For example, I have two futures on the same underlying, but maturing at different dates. Can I say which one is more ...
2
votes
1answer
375 views
Static vs Dynamic Hedging: when is each one used?
I understand that, in Static Hedging, you don't have to keep rebalancing the offsetting position(s) while in Dynamic Hedging you have to constantly keep re-adjusting it. What I'm not clear on is when ...
1
vote
0answers
59 views
How should I interpret this Put Option delta graph?
In the following graph there's an example of Delta for a Call Option and a Put Option. I understand what this greek means and I understand why it's positive for calls and negative for puts. What I don'...
0
votes
1answer
86 views
Does a barrier breach in a geared put structured note result in greater losses for the investor vs a plain knock in barrier?
I understand how knock in barriers work. But what do geared put in a structured note mean? My understanding is in a geared put vs a regular knock in barrier, the loss for the investor is higher if the ...
2
votes
1answer
135 views
How are leveraged futures paid out if they are zero sum?
Alice buys 10 contracts from Bob at 100x leverage and a total cost of Β£100 - Bob's order was also at 100x leverage.
Bob is 10 contracts short and Alice is 10 contracts long.
Both have a margin ...
3
votes
1answer
290 views
Impact on DV01 of cbot bond futures by changing coupon from 6% to 4%
CBOT has been asking customers lately what their thoughts would be on coupon change from 6% to 4% on all bond futures. I believe the last time this was done was in 2000 where the coupon was changed ...
4
votes
2answers
305 views
Option on an Option
What is the value of the contract (to be paid at current time $t_0$) that gives one the right (but not obligation) to buy a Vanilla Call option (with certain strike K) at a pre-determined price $p$ at ...
1
vote
1answer
61 views
Why does an autocall on a linear payoff have vega?
Consider a (stochastic) linear index, say $I(t)$, in that it grows at the risk free rate (with some volatility of course). There exists a maturity date $T$ on which I receive $I(T)$; however there is ...
0
votes
0answers
31 views
Why does an interest rate derivative being in- or out-of-the-money influence the optionality of a multi-currency CSA?
Background
Consider a derivative contract with multiple cash CSAs, with the ability of the counterparty posting the collateral to switch to the cheapest-to-deliver (CTD) CSA.
Of the possible paths of ...
1
vote
4answers
241 views
What book(s) would you recommend for structuring and pricing Exotic Products?
I've been looking for good books on structuring equity derivatives (Principal Protected Notes, Autocalls, Lookbacks, Reverse Convertibles etc). I only found ones that discuss mainly the theoretical ...
2
votes
1answer
244 views
Pricing Swaption Analytically using Libor Market Model
I was asked the following question in a recent interview: "(i) Express a forward swap rate in terms of forward Libor rates. (ii) Apply Ito's lemma to this expression to derive the process for the ...
0
votes
0answers
17 views
How to calculate reissue price for structured product?
There is a principal structured product which tracks gold prices capped at 12% and 145% Participation. So to achieve this I have kept some amount in Fixed income and rest is used to buy bull call ...
3
votes
1answer
101 views
Cox-Ingersoll-Ross: Monte Carlo Simulation
I am trying to build a Monte Carlo simulation in Excel (yes, far from optimal) for valuation of a callable bond. I have some experience with MC simulation on path dependent derivatives with stocks as ...
1
vote
1answer
100 views
PnL due to model recalibration and its relationship with hedging error
Consider the case where at t=0, I calibrate my model to the market, but at t=1 my model is no longer able to recover the price in the market, so it needs recalibration. Say I have delta hedged my ...
1
vote
1answer
97 views
Can you predict MTM gain or losses on future contract?
I am working on a structured product where I am investing some percentage of invested amount in futures contract. I have created a bull put strategy and I will calculate the delta positions of that ...
2
votes
0answers
53 views
Estimate of basket volatility
We are looking for a simple way to calculate an approximation of the basket volatility for a set of baskets so that we can estimate which basket might produce the highest coupon in a standard ...
0
votes
0answers
27 views
Are there noticeable jumps in index options price due to systematic hedging of structured products close to big expiry dates?
I am looking at investigating factors that will cause jumps in index options prices close to big expiries in the name. I imagine systematic rebalancing of structured products will have a large impact ...
0
votes
1answer
87 views
How can we unwind a Index ( SPX ) Variance swap?
Client A comes to dealer to trade variance notional $1m at T=0. The trade is executed with dealer short volatility with strike of 20.
term Payoff of dealer = notional*( Stike^2 - realized vol^2 )
now ...
1
vote
1answer
53 views
The relationship between volatility of underlying asset, leverage and the volatility of the derivative
If I want to lower the risk of the portfolio then the trivial thing to do is change from higher volatility to lower for a better Sharpe ratio. It already lists the volatility for the stocks but the ...
6
votes
4answers
511 views
Find a formula for the price of a derivative paying $\max(S_T(S_T-K),0)$
Develop a formula for the price of a derivative paying
$$\max(S_T(S_T-K))$$
in the Black Scholes model.
Apparently the trick to this question is to compute the expectation under the stock measure. So,...
1
vote
1answer
207 views
Software implementation for valuation of exotic options
I am looking for some software implementation of pricing Average Price Call option (APO) mostly Python (or any other package.)
Exercise style is ...
2
votes
1answer
135 views
What kind of entities use exotic derivatives, and do they serve any purpose other than hedging risk?
I work in a sell-side bank in derivatives modeling. My work involves modeling and pricing of exotic derivatives and I often wonder who are the buyers of these products.
From my research, I found that ...
0
votes
1answer
57 views
Convexity of a rates Bermudan w.r.t strike
Recently there was a nice question asked on convexity of American put w.r.t strike: Convexity of an American put option
Does the same hold for a Bermudan option in rates, where they underlyings are ...
2
votes
0answers
30 views
Does equity premium puzzle affect option-implied RWDs using Arrow-Debreu equilibrium?
I am researching and learning about option-implied RNDs (risk neutral densities) and transformation to RWDs (risk world densities) using expected utility theory to compute risk aversion values.
This ...
2
votes
0answers
60 views
What are the most difficult/computationally expensive/infeasible derivatives to price?
I'm not sure if this question has a concrete answer or if it's more of a fun game, but I suppose the question that does have a concrete answer is what's the most difficult instrument to value that has ...
0
votes
0answers
34 views
Black model with negative strike price
Whats the issue if we try to price a swaption with a negative strike using Black model?
2
votes
1answer
161 views
Bermudan option exercise probability when rates rise
I am looking for an explanation of what happens to the Bermudan exercise probability (i.e. does probability of early exercise go higher if rates rise or lower) w.r.t rates. This is of course with ...
1
vote
0answers
54 views
Options pricing model inversion
He cited about Roll's compound formula for finding the lead-lag effects between stocks and options. I have a similar data for National Stock Exchange's Index, NIFTY but it's daily, not intra-day. I ...
0
votes
2answers
116 views
lead lag relationship among futures, options and stock prices
I have the data of past 10 years of NIFTY (the National Stock Exchange of India) stock, futures and options and I want to show the lead-lag relationship (which reacts first, futures, options or stocks)...
0
votes
0answers
49 views
How do I calculate FX forward hedge ratio?
Suppose I have a USD holding of 1,000,000 in my portfolio and I want to convert it into EUR in a month's time.
I enter into a FX forward contract of the same amount USD 1,000,000, meaning that I have ...
1
vote
1answer
73 views
Is the forward price equal to the future price?
If $f^{T_1}(t)$ is the price of a forward and $F^{T_1}(t)$ is the price of a future on some stock, both maturing at date $T_1$ and with the assumptions:
no dividend
constant interest rates
no ...
2
votes
0answers
32 views
Local v/s global calibration for a Bermudan Option (calibrate co-terminals vs entire matrix)
I am quite new to rates modeling and I have a question on the pros and cons of calibrating to larger set of vanilla instruments v/s calibrating to an exotic's 'natural' hedges. For example, I could ...
2
votes
1answer
125 views
Do different prices under different models admit arbitrage?
There are many models for interest rate. If two people use two different models to price the same interest rate derivative, and come to two different prices, doesn't that admit an arbitrage? How ...
