Questions tagged [derivatives]
The derivatives tag has no usage guidance.
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0answers
27 views
Cash-or-nothing and Asset-or-nothing price derivation
I was wondering how to derive the price of a cash-or-nothing and asset-or-nothing option by trying to work out the expectation under the risk-neutral measure, while assuming that the underlying ...
-1
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0answers
40 views
Calculating expected value of d(s)/d(sigma)
I am given a GBM variant like this: $dX_t = a(\theta - X_t)dt + \sigma\sqrt{X_t}dW_t$.
And I have to calculate $\frac{\partial}{\partial\sigma}\mathbb{E}\left(\max(X_T - 100, 0)\right)$.
I am ...
0
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0answers
31 views
CSA Discounting
I am confused about the way credit and funding issues are incorporated in the derivative pricing after the crisis. As I understand, to price a derivative we need to do it initially as risk free (no ...
0
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2answers
48 views
Why can a deterministic portfolio only grow at risk free rate
In black scholes derivation we assume that portfolio grows at risk free rate because the process is deterministic, my question is why is it riskfree rate? If i have information about some event in the ...
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0answers
28 views
Arbitrage and state price formulation
I must be missing something really obvious due to my temporary obtuseness. Can someone please help me see the obvious? :-P Thank you.
I am just browsing Darrell Duffie's Dynamic Asset Pricing Theory. ...
3
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1answer
84 views
The positivity of the market price of risk
Does the market price of risk, be it of stochastic volatility, interest rate or equity return, have to be positive? What is the rationale if it does?
2
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0answers
68 views
Exotic derivatives - Replication
I would like to replicate the payoff Max(0, Min(S1, K) - S2) with a combination of the following derivatives:
-> option on S1, strike of our choice
-> option on (S1-S2), strike of our choice
-> A ...
3
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1answer
91 views
Quantlib derivative valuation from zero curve
I have newly started with Quantlib-Python for valuing derivatives. In all the examples stated in this bolg or in other places, market quote is inserted and bootstrapping is done via individual rate ...
2
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1answer
66 views
Which of the following derivatives are protected from arbitrary corporate action?
Practically speaking, are individual stock futures/options and Index futures/ (options on futures) protected from arbitrary company action? Say, in the extreme, all companies suddenly pays huge ...
2
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2answers
176 views
Pricing Corridor Variance Spreads
Recently in the equity derivatives market there have been some trades on what are known as "Corridor Variance Spreads." The large equity derivative dealers and investment banks have been promoting it ...
0
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1answer
73 views
uncollateralised otc derivatives and bank funding costs
I've read multiple references that imply that the valuation of OTC derivatives being related to bank funding cost. Given that an uncollateralised OTC derivative needs no funding from the bank's ...
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0answers
78 views
Is Red Code unique per derivative instrument
Does RED Code (="Markit Reference Entity Database Code") uniquely identify the derivative that has been traded?
Is it possible to get a derivative's ISIN code from RED Code?
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1answer
27 views
Futures Exchanges and marking to market [closed]
When a futures exchange marks to the market, does it "help" the losing side or winning side. According to my knowledge, it makes the losing side lose even more by deducting from their margin account? ...
1
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1answer
86 views
Upper bound option price in volatility dimension
All,
I have a theoretical question about the value of an option when spot price goes to infinity as a function of volatility going to infinity.
I know that for a call option:
The option value ...
0
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0answers
26 views
Is there a good back-test library for Matlab, similar to Quantopian's Zipline for Python?
If so, what? I'm keen to back-test some currency trading strategies and am restricted to using only Matlab. The back-test is intended to contain forward contracts for which I only have monthly data.
2
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1answer
45 views
Optimal number of nodes for binomial lattice?
Let's suppose one is valuing a Euro call on a ZCB in a Black-Derman-Toy lattice. How many nodes/levels of discretization are optimal? Obviously too many creates computational issues and too few ...
2
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2answers
182 views
Collateralized / uncollateralized swap
Is a fully collateralized interest rate swap considered free of counterparty credit risk? Or close to risk free? Therefore discounted by the rate that best proxies the risk-free rate (which is the OIS-...
1
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1answer
78 views
Lattice pricing of derivatives under multi curve framework (OIS and LIBOR)
My goal is to price various derivatives resetting to 1M and 3M LIBOR via using a lattice. I have calculated an OIS curve for discounting and adjusted 1M and 3M LIBOR forward curves to be consistent ...
2
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0answers
147 views
OTC derivatives trade life cycle
Can someone please walk through a typical OTC derivative trade life cycle? Or could you please provide a good source on that topic? ( I mean things like negotiation - trade execution - trade capture, ...
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0answers
332 views
Cashless Exercise of Warrants
This is the formula for a Cashless Exercise of Warrants:
X(A-B)/A = Y
Where:
Y = the number of shares received
X = the number of shares purchasable
A = price of the stock
B = exercise price
...
1
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0answers
70 views
Martingale approach - Option pricing with Radom-Nikodym
I would like to get the price of an option which pays at time T the minimum between the logarithm of (S(1,T) / S(1,0)) and the logarithm of (S(2,T) / S(2,0), with the following processes:
(The two ...
3
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1answer
214 views
Local Volatility implementation
The Dupire equation is well-known and mentioned in thousands of articles. Although I could not find a lot of documentation about a consistent and proper way of implementing the formula (The difficulty ...
2
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0answers
57 views
Structured Energy Option Pricing
Let's say I have an option with the following terms. This is for an energy product (ie natural gas)
The contract will last for 6 months
The payoff is the difference between the first of month index ...
4
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2answers
148 views
Contingent claim and Derivative
What's the difference between a derivative and a contingent claim? What is an example of a derivative which isn't a contingent claim?
Since options or swaps are examples of derivatives that are ...
2
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2answers
431 views
Different ways to express a 2s10s steepener?
Some off the top of my head
2s10s cash steepener, however this ages into a 1s9s over time
2s10s swap steepener, better/cleaner way?
Are there other ways to express this curve strategy? Would you do ...
2
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0answers
239 views
Multi-currency CSA discounting curve construction
I have a number of eur/usd and gbp/usd MtM Basis swaps that are collaterized in USD. For the non-usd legs I'm constructing the muti-ccy csa discounting curve. Im using forwards for the short end of ...
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0answers
33 views
Are there software to compute Initial Margin and MVA and other xVAs?
I have been looking into Matlab, R, Python, but couldn't find any toolbox for computing IM, MVA, xVA for OTC derivatives...
Could anybody please point me to some software which can compute these ...
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2answers
38 views
What would be the issue price of the following contract?
Stock currently A has a price equal to 100.
Stock B also currently has a price of 100.
The contract has a maturity $\mu$ of one year.
At maturity the payout is the max price of either A or B.
What is ...
1
vote
1answer
84 views
Rebasing of Cap Volatilities
I recently found this article where towards the end the author describes a method to rebase cap volatilities.
Their method works like this: for a fixed strike assume that you are given the implied ...
0
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1answer
75 views
Black 1976 caplet value
I've seen from two sources different formulas for the caplet value (Black 1976):
$$Caplet_1 = N\cdot DiscountFactor_{0,k}\cdot yrFrcn_{k,k+1}\cdot [F_{k,k+1}\cdot N(d_1) - R_k\cdot N(d_2)]$$
$$ ...
0
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1answer
190 views
Use of cap volatilities
I have a cap volatility surface for the 6 months Libor.
Can I use the same cap volatility for every cap's caplet to valuate the full cap?
Example: Valuate a 18M cap (Libor 6M) by valuating 3 6M ...
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0answers
36 views
Compound option on basket of swaptions
Consider $n$ European Swaptions $S^n$ with exercise dates $T_1 < \dots T_n$.
These Swaptions can have different parameters: in particular different strikes, different interest rates, different ...
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1answer
309 views
How to use USD OIS discounting for local currency uncollateralised swaps?
I am wanting to do MTM valuations of uncollateralised swaps as our banks have switched to using the USD OIS curve for their discounting (assuming no xVA adjustments). None of the cashflows we are ...
5
votes
2answers
145 views
To what degree does computational complexity affect the pricing of options?
I have been tasked with writing a 25 page paper on computational complexity. The first 10 pages of this should be background an introduction to the field (which I have largely done already) and the ...
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1answer
96 views
How do I value uncollaterised swaps?
Do I need to discount using the OIS curve?
Then add some sort of FVA adjustment over and above the CVA/DVA? How do I work out a banks cost of funding?
Any help would be greatly appreciated.
...
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0answers
39 views
Near-the-money options' range
I basically have one year (2016) of data of vanilla options written on SPX. I was trying to isolate the ATM options, but it is hard to have derivatives having exactly K = S in a given day. For that ...
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1answer
288 views
Fixing date, start date, end date in interest rate derivative valuation?
I was reading a technical report by Hagan, which can be downloaded here on the valuation of accrual swaps and range notes.
It caught my attention that in the valuation he comments this:
Consider ...
1
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1answer
207 views
Pricing of a derivative using Risk Neutral Valuation.
I am new to option pricing and following problem came up that I don't understand how to handle.
A derivative will pay out dollar amount equal to $$\frac1T\ln \frac{S_T}{S_0}$$ at maturity, where $...
4
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1answer
111 views
Books/papers on Insurance Derivatives?
I am looking to learn more about insurance-linked securities. I work for an insurance company and am interested in catastrophe risks and cat bonds.
I have a good statistical background and master-...
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2answers
804 views
What is the difference between funded and unfunded derivative?
What is the difference between funded and unfunded derivative?
Can anyone explain the difference between these two?
0
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0answers
262 views
Relationship between Caps, Floors and Swaps
Recently I started studying interest rate derivatives, especially caps, floors and swaps. Although I understand what each of these does I don't see how they relate and also I can't seem to sketch the ...
1
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1answer
146 views
Quantlib: Getting error trying to price a Swap
I have bootstrapped my curve based on end-of-day data for 24th Nov, 2017
I am then using that to price a off-market swap as below:
...
1
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1answer
257 views
Books about Monte Carlo Simulation on derivatives with Python
I am looking for a good reference for Monte Carlo simulation applied to derivatives with Python. Most books I found until now deal with C++... I have found "Derivatives Analytics with Python" by Yves ...
2
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1answer
114 views
Binary option analytical formula
Given $r=0$, $\sigma(K)=\text{const}$ and:
$$ \text{Binary} = \lim_{ε → 0} \frac{(C(K,\sigma (K))-C(K+ε,\sigma(K+ε)))}{ε} $$
I have to find the analytical expression for the above.
Since $σ(K)=\...
2
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2answers
272 views
The dice game and derivatives trading
I happened to a interview question:
Give a equal dice, you will gain the money which is the number you roll, then how much will you pay for the game.
Naturely, the answer is 3.5. But the interview ...
1
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1answer
139 views
Number of Time Steps in Binomial Option Pricing - Problem?
I am trying to price a digital option and the final price under different number of time steps are as follows:
Is it possible to have a graph like this?
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1answer
87 views
Calculating expected loss using actual probabilities
I'm calculating expected loss on fixed-income using actual default probabilities and risk-free rate as the discount factor. I understand this is not theoretically correct. In absence of risk-neutral ...
2
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1answer
167 views
at-the-money short term straddle and the implied vol
Here is a passage from "Advanced Equity Derivatives: Volatility and Correlation" by Sebastien Bossu, Wiley (2014).
We see the prox $\beta_0,$ it seems to use the approximation that ...
2
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2answers
159 views
Pricing 0% interest rate Floor Black Model
I'm having some trouble pricing a 0% interest rate Floor following Black's formula. The term d1 contains the expresion Ln(Forward/Strike)
if the strike is exactly 0 this expresion yields an ...
1
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1answer
138 views
eurodollar future
I just found out about eurdollar futures and I am confused.
A eurodollar future contract is defined as a cash settled future based on a Eurodollar Time Deposit having a principal value of USD $1,000,...
