Questions tagged [derivatives]

A financial contract whose payoff is linked to the evolution of an underlying security.

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25 views

Commercially redistributable derivative market data source

Is there any derivatives market data source that gives permisson to use this data in a financial model and then sell a product with it? (derivatives valuation for example) I'm looking for a cheap ...
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Are there any studies on the link between energy markets and hedging-strategies for Cryptocurrency mining?

Full Disclaimer: I first asked this question on Bitcoin.SE, however I feel like my question is more relevant to this site as there would be wider knowledge and insight of some better sources or ...
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How does the underlying get delivered for electricity market derivatives?

I have been reading around energy markets recently and recent schemes such as Voluntary Carbon Markets, similar to the 'cap and trade' style of the Kyoto Agreement in 1997. I have been reading in ...
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What is the Radon-Nikodym derivative in the Heston model?

It is clear to me that $$ \frac{dQ}{dP} = e^{-\lambda W_T-\frac{\lambda^2}{2}T}$$ is the Radon-Nikodym derivative that defines the change of measure in the framework described by Black and Sholes. But ...
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Relationship between Vega and Gamma in Black-Scholes model

my question is the following one: I don't manage to prove that, in Black-Scholes model, single-signed Gamma options have values that are monotonic in the volatility. I am looking for an exhaustive and ...
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Is the market price of risk deterministic or stochastic in the Heston model?

I am recently digging into the Heston model and I have noticed that every author refers to the market price of risk simply as $\lambda$, or sometimes it is more clearly specified to be bi-dimensional ...
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113 views

Use of CNY and CNH derivatives

I was wondering what are the reasons why investors use USDCNH forwards vs NDF on USDCNY? Do you usually pick CNH for trade reasons, while CNY more for speculation as these are USD settled?
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Replicating portfolio in the Heston model

Given the Heston model $$dS_t=\mu S_tdt+\sqrt{\nu_t}S_tdB_{1,t}\\ d\nu_t=k(\theta-\nu_t)dt+\eta\sqrt\nu_tB_{2,t}$$ how should the replicating portfolio $V_t$ for the derivative $F_t$ be composed? I ...
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301 views

How do market makers calculate the IV for options?

This might be silly or basic question but I'm wondering how do a market makers do decide on fixing an option IV on certain level ? how do they do theirs calculations ? Thank you
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107 views

Hedging with FX swaps

I am trying to get the mechanic of the swap rollover. Funds usually hedge FX risk of their long term foreign assets (eg UST) with short term FX swaps (usually maturity < 1yr), by rolling over fx ...
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Derivatives notional amount in BankFocus

I'm searching for the notional amount of derivatives in banks' balance sheets. I'm using "BankFocus" (ex Bankscope) to download data. In balance sheet i find just the fair value of ...
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How is calculated the futures/forward convexity adjustment for FX?

I could find lots of stuff online for IR derivatives but it seems there isn't too much on FX for this specific adjustment.
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Valuing Option Credit Spreads

I'm trying to come up with a metric to value and compare spreads. One way that I was doing this was to compute the Expected Value of the spread. To calculate the expected value I used the following ...
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46 views

FX swap implied yield from bloomberg

I am trying to reproduce the bid EUR implied yield I see in the screenshot below for 1y tenor which is -0.6226%. EUR implied yield bid = spot_bid/fwd_bid *(1+i_USD_bid) - 1 Inputs from BBG terminal: ...
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span for spreads using options

I am trying to calculate the margin required for a spread in futures. The cme rules says that they use SPAN which goes through a few different cas to see what happens to the portfolio. If I have 2 ...
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Collateral and discounting of future cash flows

I am a beginner in this space and did some research on how the collateral posted affects the choice of the discounting curve in derivatives transactions. We have two scenarios based on the PV of a ...
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Bid Price of a Forward?

Say I am a market maker. The ask (me selling it) formula is pretty common in textbooks etc by no arbitrage: $$F = S \cdot \text{exp}(r-d)$$ where $r$ is interest rate and $d$ -- dividend. Again, by no ...
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113 views

Why might a cross currency swap from EUR into USD have higher CVA than a cross currency swap from USD into EUR?

I was having a discussion with a colleague in the industry, who mentioned in passing that CVA on a cross currency swap from EUR into USD (pay EUR) is always higher than if paying USD and receiving EUR....
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FX Forwards collateral and discounting

What is the market convention for discounting the future cash flows of FX forwards? In particular, I would be interested to know what discounting curves are used for both collateralised and not ...
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110 views

resettable/MtM cross currency swaps

I am trying to understand the mechanics of resettable xccy basis swaps and put together a numerical example. I'd like to know if 1) periodic interest payments are calculated on the original notional ...
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How are total return swaps quoted?

A) spread $s$ only. B) spread subtracted from the funding, e.g. LIBOR, rate, i.e. $(r-s)$. ?
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103 views

Currency swap terminology

With reference to cross currency swaps, what does it mean to receive the basis? "Demand from Japanese institutions to receive basis (USD funding) increased due to emergency dollar demand due to ...
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1answer
142 views

AUD funding rates

I am looking into into AUD rates and I am a little confused. I tried to summarise below my doubts. FX swap basis (difference between AUD FX swap implied rate and AUD OIS rate). Before covid-19 it has ...
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107 views

Method of comparing two option pricing models?

I am currently writing a small paper comparing the Black-Scholes formula to the Bachelier model. However I am wondering how exactly I should compare the two models? Obviously I am comparing the prices ...
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Cost of shorting currencies

I thought cost of hedging/going short on a currency with a forward was given by F/S-1 but it seems the author states 0.25% (see below). Am I missing anything (transaction costs, balance sheet costs, ...
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Carry trade question

Usually carry trades involve borrowing in a low yield currency and invest in a high yield currency. For example, I borrow dollars and invest in Brazilian real. I then use a rolling FX swap to hedge ...
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Pricing of $(S(T_0)-S(T))^+$

Problem: Consider a new derivative that at time $T$ pays $Y =(S(T_0) − S(T))^+$ where $0 < T_0 < T$ is a fixed date. (i) Show that the arbitrage-free of Y at time $t = T_0$ is given by $\pi_{...
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Japan benchmark rates

Can you please confirm on the following? The difference between TONA (also called TONAR), JPY Libor, TIBOR is that: JPY Libor, TIBOR are based on quotes from panel banks. The difference between them ...
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Risk-Neutral probability deduction [closed]

Could anyone show me how to get the second row equation from the first row equation please? For each letter, $p$ is the risk-neutral probability in the risk-neutral world, $u$ is the up factor for the ...
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Brazil FX market “cupom cambial” [duplicate]

I am trying to understand the role of cupom cambial (onshore dollar rate) in relation to the BCB swaps which are domestic NDF settled in real. "The cupom cambial is priced in basis points as an ...
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Non attainable claim - Incomplete market

I am wondering whether there is a standard procedure to find a non attainable (i.e. non replicable) asset in an incomplete market. As an example, let us have the following market ($B = (B^1, B^2, B^3)$...
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39 views

Hypothetic derivative that absorbs underlying volatility

Market participants are usually assumed to be risk-averse and striving to improve the Sharpe ratios of their portfolios. Thus, if we have an asset A, which is expected to return between \$900 and \$...
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Future forward convexity adjustment as the expected profit from reinvesting margin payments?

Having looked at the formula for the convexity adjustment as a function of the covariance between rates accruing till maturity and asset price, I have an intuition that the difference between fair ...
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Interest rate futures notional

I was wondering what is the notional used to calculate tick values when the underlying of the futures is the average of an overnight rate (eg 1m SONIA futures, 1m EONIA futures, etc.)? When the ...
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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 ...
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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 ...
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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 ...
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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 ...
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3answers
150 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 ...
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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?...
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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, I’ve been looking for some approaches for estimating a ...
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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 ...
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1answer
115 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 ...
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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 ...
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1answer
82 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 ...
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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 ...
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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 ...
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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?
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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 ...
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67 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 ...

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