Questions tagged [derivatives]
A financial contract whose payoff is linked to the evolution of an underlying security.
323
questions
1
vote
0answers
31 views
Application Itô's Lemma: Forward to Spot process
I am working on the following equation (I want to apply Ito's lemma on it):
and I know that:
and also
and
My problem is that I want the dynamic of F(S,T) without S because I need first to ...
1
vote
3answers
77 views
Does a future contract's price show where investors think the underlying asset's price would be?
When the price of an asset's future contract is at a certain level, does that mean investors as a whole expect the actual underlying asset to reach that price level in the future?
1
vote
1answer
36 views
Different performance between GLD, IAU and PHYS
At this very moment (about 10:15, 2020/3/24), GLD/IAU are up about 4.5% and PHYS about 3.5%
What causes such differences? Gold bars are in short supply around the world (https://www.ft.com/content/...
0
votes
0answers
52 views
How does modeling provide an edge to banks in the derivatives space?
I was thinking about the actual need for creating quantitative financial models, especially for derivative products. Consider simple calls and puts for different strikes and expiries on stocks and ...
0
votes
1answer
76 views
Python Quantlib : How to value the Non Deliverable currency Interest Rate Swaps?
I followed all the procedure in Quantlib to process interest rate swap valuation through Python Quantlib. I valued more than a million records. All the valuation is almost the expected amount. But '...
0
votes
0answers
47 views
Duration of forward starting swap
For a spot starting interest rate swap, the duration is calculated as the duration of the fixed rate leg less the duration of the floating leg. Each of these calculations is akin to calculating the ...
1
vote
1answer
108 views
Going from $\mathcal{P}$ to $\mathcal{Q}$
Under $\mathcal{P}$, we have the Heston Model given by:
$$
d S_{t}=\mu S_{t} d t+\sqrt{\nu_{t}} S_{t} d W_{t}^{S},\\
d \nu_{t}=\kappa\left(\theta-\nu_{t}\right) d t+\xi \sqrt{\nu_{t}} d W_{t}^{\nu}.
$...
0
votes
0answers
32 views
Calculating the total return on an Interest Rate Swap (with 1 year of duration)
Say I am the fixed rate payer on an interest rate swap and have 1 year of duration of exposure.
When I entered into the IRS (say yesterday), the quoted rate on Bloomberg was 15%.
Say tomorrow the ...
0
votes
2answers
66 views
Option on a dice game with three dices and min. value
We have a call option on 3 dices with strike 3. What's the fair value of the call when it pays the min value of the 3 dices?
E.g if we throw and have 426, the min is 2 here and so call is OTM (S < ...
0
votes
2answers
160 views
Hull-White Calibration /Hypothetical Cap Pricing
I have a question regarding calibrating Hull-White (Extended Vasicek) Model to bond data. As you know, and stated in Mercurio (2005), zero coupon bond price in the Hull and White (1994);
$P(t,T)=A(t,...
1
vote
1answer
74 views
Arbitrage when discounting and forward computation is done with different curves
I notice that (equity derivatives) trades generally are priced with different forward curve and discounting curve, which clearly lead to arbitrage. Is this arbitrage value too small to be ignored? How ...
1
vote
1answer
101 views
Intuition for consistent Derivative Prices under different Numeraires and Measures
This is essentially the Fundamental Theorem, however I am not asking for a thorough proof, I am more interested in the general intuition.
In words, it makes sense that whatever your unit of account (...
1
vote
0answers
59 views
Calculate upper bound for put option prices?
I need to know historical option prices for backtesting. The problem is I don't have such historical data.
Is there a way to calculate the upper bound for out of money (American) put option selling ...
0
votes
1answer
41 views
What is the difference between exercise and expiry date?
I know in American options you can exercise the options at any time before expiry date but in European options you can only exercise the options on expiry day.
On National Stock Exchange of India the ...
1
vote
1answer
131 views
How do market makers chose the size that they quote?
A typical quote in the derivatives market may be 2.00 bid at 2.50 ask with a size of say 100x100. How do practitioners go about choosing the size of the market (how many contracts) to quote? It seems ...
0
votes
0answers
34 views
Derivatives - how to build the term structure of the cost of carry
1) By using the settlement prices, build the term structure of the cost of carry for the contract. Use the first two contracts to extract the implicit index that you will be using for all the ...
1
vote
1answer
51 views
partial derivatives of multivariable function
Looking to verify whether the following formulation is correct. Suppose we have the following function, relationships:
$$y=f(x)$$
$$x=g(a,b)$$
$$y=f[g(a,b)]$$
Is the below correct (including ...
2
votes
1answer
77 views
i have an option derivative question
please show that the call and the put share the same vega, i.e., please prove the following equality.
do we derive the call and put equations ?
1
vote
0answers
48 views
Algorithmic trading strategies for financial derivatives
are there any strategies or considerations specifically designed for the algorithmic trading of financial derivatives, or textbooks that focus on this topic rather than underlying equities and ...
0
votes
0answers
23 views
Quantlib gives error message when Valution date is backdate
Valuation Date As Backdate(12 November 2019)
On calcuating Vanilla Swap, Quantlib gives error message as below
...
1
vote
1answer
50 views
Call price in case of AOA
I have this exercice, and for the last question, i tried to say that with lower bound, $C > S_0 - Ke^{-rT}$ which is $-8$ something but it doesn't make sense so i don't know what to do. Could we ...
0
votes
3answers
215 views
Is EONIA swap rate really credit risk free?
I have a question linked to the EURIBOR – EONIA spread (or OIS LIBOR spread).
I understand that the EURIBOR - EONIA spread is a credit risk indicator of the interbank market.
There is something I ...
3
votes
0answers
150 views
Estimating Market Price of Risk
I need help with estimating market price of risk. Assume money market account and two risky assets which exposed to same two sources of risks follow process:
$dM(t)=rM(t)dt$
$dS_1(t)=S_1(t)(\mu_1dt+\...
2
votes
0answers
74 views
Delta Hedging Example
I was reading Dynamic Hedging by N. Taleb and in the chapter dedicated to the delta, there is this example of a trader position in options (one-month European call, flat yield curve, forward is ...
2
votes
1answer
155 views
Cap price as bond options
I am currently struggling with model calibration of the Hull-White (or Vasicek) model to Caps and Floors. My main problem is that I am confused about the notation.
In Brigo & Mercurio (2006, p. ...
2
votes
0answers
65 views
What model do market makers in equity derivatives commonly use to price, hedge, and fit the IV surface?
What is the industry standard/common model used by market makers in equity derivatives to trade across the IV surface?
0
votes
1answer
85 views
Relation between ATM, RR and BF
In FX derivative market, why does vol spread of ATM > RR > BF? ATM is the most liquid and intuitively it should have the lowest spread. Please help me in understanding the rational behind the above ...
3
votes
0answers
73 views
Pricing of future options
I have the following question on futures options:
There is a Black’s model, which is a variant of the Black-Scholes formula that is used to price stock options. The Black’s model prices future ...
3
votes
0answers
70 views
Understanding the notion of future options
I am currently studying different types of option-related derivatives and I am quite confused about the notion of “futures options”.
My textbook says that
A futures option is the right, but not ...
4
votes
1answer
106 views
Option pricing: Relationship between Theta and early exercise
I am confused about the following:
For a European put option, the parameter $\Theta$ is given by
$$ \Theta= \frac{d V}{dt} = -\frac{SN'(d_1) \sigma}{2 \sqrt{T-t}} + rK e^{-r(T-t)}N(-d_2).$$
My ...
3
votes
0answers
54 views
What models are used for pricing cliquet options (esp. for Asian Equity underliers)? How good is Bergomi model?
What are the most common models, actually used by trading desks for Asian underliers, for pricing cliquet options?
I would like to know both - (1) the production model used for daily P&L, and ...
4
votes
3answers
311 views
Compute the price of a derivative
Consider the payoff function
\begin{align*}
f(x)=\begin{cases}
3 & \text{if }x\leq 30, \\
33-x & \text{if }30<x<35, \\
-2 & \text{if } x\geq35.
\end{cases}
\end{align*}
How would I ...
0
votes
1answer
92 views
Finding todays price of a derivative
Today's market prices for European call options $c(T;K)$ and put options $p(T;K)$ with maturity T and any strike K.
Let $B_t = e^{rt}$ be the price of the risk-free bond and St the price of the stock.
...
0
votes
1answer
141 views
What happens to both sides of an inflation swap agreement if there is deflation?
If there is deflation does the Inflation receiver not only pay the fixed leg but also receives a reduced CPI?
I.e. does he lose twice?
5
votes
1answer
187 views
When would open interest equal trading volume?
I know the difference between open interest and trading volume. Open interest is the number of contracts, long or short, outstanding. Trading volume is the number of contracts traded in a day.
...
1
vote
0answers
58 views
What is the name of these digital basket options?
Consider a basket of correlated assets $(S_1(t),\ldots, S_N(t))$, as well as a vector of strike prices $(K_1,\ldots,K_N)$, and let's look at the following European payoff types:
An option that pays 1€...
0
votes
2answers
89 views
Why would a buyer buy a Warrant vs an Option, both having the same economics
Assume you have a Warrant and an Option both with the same economics i.e strike, expiry, type etc.
Also assume that the Warrant has been issued by a high grade reputed issuer (i.e there is a almost a ...
0
votes
1answer
65 views
If short rates $r(t)$ do not determine the bond prices $P(t, T)$, then what is the basis for short rate models?
The question title says it all: We know that in general, specifying the short rate $r(t)$ does not specify the bond prices $P(t, T)$. So how can a model for short rates—for example the Vasicek model—...
1
vote
2answers
364 views
Valuation of Total return swaps (TRS)
I have seen a TRS being valued which has an index as underlying on the asset side. It also has a coupon rate associated with it. Asset leg is calculated by taking
...
3
votes
1answer
252 views
Difference between FRA and a zero coupon swap
Wanted to know the difference between an FRA and zero coupon swap with both legs having payment at maturity. If the zero coupon swap is forward starting, will it be equivalent to an FRA?
2
votes
0answers
43 views
Difference in utility of cap/floor and FRA
What is the difference in utility for cap/floor and FRA? To me their function looks very similar. Are they used for different objectives. One thing I know in difference is that the pay off for cap is ...
2
votes
0answers
61 views
Banks' use of written interest rate options
I study US commercial banks data. I look at the notional amounts of their different OTC interest rate derivatives for the recent years. When I look at non-dealer banks (i.e. end-users), I find that ...
1
vote
1answer
81 views
Black Sholes option pricing with all but Delta [closed]
I'm trying to setup a little option pricing model in excel. I have all the information for the inputs (interest rate, IVs for different deltas, time to expiry, strike price, underlying price) but what ...
0
votes
0answers
54 views
Solutions for Paul Wilmott Derivatives Book
I am looking for solutions manual for Derivatives, "the theory and practice of financial engineering". I'm not sure if the manual is published ever but I couldn't get it.
I would be more than happy ...
2
votes
0answers
76 views
Bates Model Jump Percentage Parameters
I am trying to calculate the jump parameters for the Bates volatility jumps, specifically, the mean of the jump percentages, $\mu_j$. For the value of $J$, I am using jumps $|\frac{s_{i}-s_{i-1}}{s_{i-...
2
votes
0answers
82 views
How to determine expected returns of an options portfolio?
Lets say I have a delta neutral portfolio, iron condors on spy for example. I'm short a call credit spread and a put credit credit spread of equal widths. I would like to determine the expected ...
0
votes
1answer
61 views
Can someone explain to me the intuition behind the discount factor for this simple payoff? [closed]
Let's say you enter into a contract today in which in time t, you receive the difference between the underlying stock price and 100. Denote the stock price as S. Why is today's value of such a ...
1
vote
1answer
113 views
Pricing with local volatility for derivatives beside options
Say I have calibrated an local volatility mode to market data on a forward on stock X. Say I want to price a derivative Y that is NOT a call/put option. What is the (or one of many) general strategy ...
0
votes
1answer
41 views
Where can I find the formulas to compute the Greeks for European Call and Put Options Assuming no annual dividend yield?
Every formula I come across involves a $q$ (the annual dividend yield). Where Can I find the formulas to compute the greeks assuming no dividends?
1
vote
1answer
50 views
Equivalence of formulas for pricing the Delta of a European Call Option?
I came across two formulas to compute the Delta of European Call Options.
The First:
$\frac{\partial C}{\partial S} = e^{(b - r)T} N(d_{1})$
The Second:
$\frac{\partial C}{\partial S} = e^{-qr}N(d_{...
