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Questions tagged [derivatives]

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

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Definition and Building of Funding Curve

Q on Funding Curve, have understood the Funding Curve to be a time-series data point of current and expected cost of funding, i.e. how much you have to spend to borrow money, or interest rates. So how ...
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variation margin affecting futures price

A quote from Natenberg's Option Pricing and Volatility, on stock index futures and how variation margin can change their price. Ignoring dividends, the fair value of a stock index forward contract is ...
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Why do we use OTM options to extract implied vol?

It is often common practice to calculate implied volatility using puts for low strikes and calls for high strikes, so to always employ out-of-the-money options. Why is this often preferred to using ...
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What are common parametric forms for VIX smiles?

It is common in SPX markets to fit smiles using Stochastic volatility-inspired and Surface stochastic volatility-inspired parametric forms introduced by Gatheral and Jacquier (2014). In VIX markets ...
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why shouldn't you exercise this american option early? [closed]

I know there's many questions of this vein, but I'm still confused why for American call options on non-dividend-paying stocks, early exercise options never make sense. Suppose I had purchased a 100 ...
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time value of option proportional to sqrt(time)

I'm reading Natenberg's Options Pricing and Volatility, and in Chapter 18, he mentions this about an example: We can further refine our approximation if we note that an at-the-money option is made up ...
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Pricing a custom option in terms of simpler instruments

I have the following custom European Option $F$ on the underlying $S$ whose pay-off at expiry $T$ follows: $$ F(T) = \min{[B, \max{[K_1-S(T), S(T)-K_2,0]}]} $$ where $B$ is a cash position and $0<...
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Callable Bond Delta Profile

I am analyzing a callable bond with 10 Years of maturity coupon paid monthly at market rate plus the spread of 25 bps. The bond has an American Call option embedded. The strike price of a bond option ...
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Question on unwinding cross-currency swap

Hoping someone can help me understand 'Notional Exchange Unwind Value - NEUV' when terminating a cross currency swap prematurely. Where the NEUV is essentially the profit/loss of the notional exchange ...
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Where can I find implied rates for central bank decisions?

Sometimes I'll see sources online say things like markets are pricing in a certain amount of bps rate cuts/hikes by the Fed or ECB (or some other central bank) for a certain monetary policy meeting ...
Man Dem's user avatar
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Does value of a TRS only involve past price movement and not expected returns?

Is the value of a TRS just the difference between the "financing leg" (e.g. the side paying -IBOR plus spread) and "asset leg" (e.g. the side pay income and price changes), with of ...
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Hedge Effectiveness

I am trying to prove the hedge effectiveness of a SWAP, I know that a regression needs to be done between the hedged item (Loan) and the hedging instrument (SWAP), but I don't know which values should ...
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Price Path Dependent Swap

Let's say we start at t0, with a vanilla XCCY Swap contract (one leg paying Fixed Rate r, and denominated on Ccy1, the other leg paying Floating Rate f on Ccy2). Now let's assume you have two ...
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Decomposition of Step-up swaps

is there a general procedure to decompose a fixed-floating interest rate swap, where the fixed rate changes period-to-period, into a basket of co-initial swaps, each with a different fixed rate? For ...
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Benth: Risk-neutral measure in incomplete markets

I am currently working on Benth and Benth "THE VOLATILITY OF TEMPERATURE AND PRICING OF WEATHER DERIVATIVES" and i am stuck at following paragraph at page 10, which is about risk-neutral ...
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Can someone please help me answer this question about Black-Scholes model? (risk-neutral & true probability of the call option) [closed]

I don't even know where to get started with this question...can someone please help me? How do I answer it?
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How to Correctly Price Currency Forwards/Futures [duplicate]

I am trying to understand how to price a forward contract on the GBP/USD currency pair and then compare my answer with current future prices on GBP/USD. If my understanding is correct I believe we ...
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Calibrating SABR -- Can I calibrate the forward like any other parameter?

Essentially the title to the above. I am using SABR to price caps and floors (as well as options on SOFR futures). I currently have two calibration techniques, the first calibrates based on rho and nu ...
Zac Likes Vol's user avatar
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What is the purpose of a floating interest rate leg on an autocallable equity swap transaction?

I understand that the purpose of the equity leg is to hedge the issuers exposure under the note but I don't understand why the buyer of an autocallable equity swap pays a fixed fee at the beginning of ...
Robert Smith's user avatar
3 votes
1 answer
234 views

Computing Derivative Security with Change of Numeraire

Under Black-Scholes, price a contract worth $S_T^{2}log(S_T)$ at expiration. This is a question from Joshi's Quant Book (an extension question). Ok, so I solved this with 3 different methods to make ...
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Why A Derivative With Intrinsic Arbitrage Cannot Be Valued & Hedged With Assets In Risk Neutral?

I'm attempting to concisely show why a derivative that, by nature, introduces arbitrage cannot be valued using risk neutral pricing tools. Derivative: Buyer is sold a 'call option', with time 0 value ...
TheOneTwoThreeForPumpkin's user avatar
1 vote
1 answer
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WN 30Yr UST Futures Conversion Factor vs Delivery Ratio

What is the logic behind using the conversion factor in determining the hedge ratio of deliverable bonds in 30Yr UST futures (WN contracts) throughout the trading life of the contract, but then having ...
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PFE "convergence"

I'm studying Counterparty Credit Risk. I was reading about Potential Future Exposure (PFE) and I've seen a lot of examples and graphs about how the PFE behaves (as the time horizon increases) for ...
Brownian Brownie's user avatar
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Brazil IR swaps and help with new holiday

Brazil has a pending new holiday that is expected to be official in the next month, for date Nov 20. Existing BRL interest rate swaps contracts have a clause that fixed accruals are not impacted by ...
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What book/resources would you recommend for beginners in IRD? [duplicate]

I recently graduated with a MS degree in Quantitative Finance and will presumably have some work to do with Interest Rate Derivatives (IRD) in the future. Since my experience lies more in the equity ...
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VIX future's lower and upper bounds

A Tale of Two Indices, by Carr and Wu (Jrl. of Derivatives, Spring 2006) As per the above paper of Carr and Wu (page 24 and 25), the price of a VIX future has for lower bound the fair strike of a ...
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2 votes
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Interest rate derivatives market data - download [closed]

EDIT; I looking for sources where from I could get interest rate derivatives market data? (caps,floors,swaptions, etc, is there data available for exotics ones or are they purely OTC?) I would grade ...
Dar12342's user avatar
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225 views

Moneyness, implied volatility and option greeks

I know that the more an option is ITM, the more is the implied volatility. I would like to deep dive into the concept, what is the logic that drives this statement? Also comparing an option with a ...
Maurizio Marinaro's user avatar
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Constructing payoff with options

Suppose that COMPANY A has issued a special bond that does not pay any coupons. At maturity T, the bondholder receives the principal (face value) equal to 1,000 plus an additional ...
Maurizio Marinaro's user avatar
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Calculating key dates for a Forward Starting Interest Rate Swap versus a Spot IRS

How are the Effective Dates and Maturity Dates of a forward starting IRS (eg: EURIBOR3M 5Y5Y) handled when the forward starting term ends on a non-business day? And if that date is adjusted, how does ...
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Any other ways to hedge a bond portfolio against interest rate risk? [closed]

I'm currently taking a (gentle) intro to derivatives class. One of the exercises asked me to discuss duration as a risk measure and to provide alternative methods of hedging a bond portfolio against ...
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Pricing look-back option

I have the monthly price data of a stock starting from December 2020 and I am considering a EU style look-back option issued in December 2020. The payoff at maturity of the look-back option is given ...
Maurizio Marinaro's user avatar
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Barrier Reverse Convertible on interest rate

I'm trying to find the price of an barrier reverse convertible on interest rate - https://structuredproducts-ch.leonteq.com/isin/CH1251797945. I have simulated the underlying interest rate by Vasicek ...
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futures exposure targeting (spot vs futures price)

I'm confused over if I should use spot or futures price when targeting a certain exposure. There are many websites that state you should use the contract size * futures price. Other websites, however, ...
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180 views

How to convert the parameters of multi-factors cheyette model (quasi-Gaussian model) from tenors to factors?

The book "Interest Rate Modeling" by Andersen and Piterbarg is an extermely fascinating book on interest rate derivatives. Recently, I have encoutered some issues while reading this book. ...
Yong-guang Gong's user avatar
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Why historical data of futures contract price include data after settlement date of the contracts?

I am studying historical data of futures contract prices. I found there are price data after the settlement date of the contract. For example, for Hang Seng Futures with expiry date of Jun, there are ...
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How are VIX options priced in a mean-reverting framework?

If a trader assumes that the VIX follows a mean-reverting process like the Orstein-Uhlenbeck process, how would they price this non-martingale asset? My intuition tells me a trader would use doob-...
THATS MY QUANT MY QUANTITATIVE's user avatar
2 votes
1 answer
174 views

From parameter risk (sensitivities) to market risk (sensitivities)

In models where the underlying is not modeled directly - such as in the HJM framework or short rate models - how does one then compute the Greeks, i.e. sensitivites wrt. market variables. As an ...
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Why are we so focused on Zero Coupon Bonds?

In fixed income markets there seem to be two prevailing term structure modelling approaches: Market Models HJM Framework In Market Models, such as the LIBOR Market Model (LMM) and SABR it is common ...
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Analyzing the Impact of S&P Volatility Shift on ATM Straddle Sale: Calculating Loss/Gain[black scholes]

Black scholes:The 1-month implied volatility of S& ;P is 16. The slope of the skewness curve is -1 point per 1%; For example, the 99% exercise trades at a premium of 1 vol point. regarding the ...
Alexander's user avatar
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FX FORWARDS Calculating funding cost and wether funding will be expensive or not

Lets say for example my TN for USDHKD point per day spot is -1.9467 and for 1mnth it is -1.4142 and the notional is 100m HKD dollars. Would you say more or less I would be flat in terms of funding ? ...
EarlyFx's user avatar
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When to use total derivative and when not to?

as I was trying to teach myself financial mathematics, I came across this topic on transforming black scholes pde to a heat equation. I had the exat same question as this post Black Scholes to Heat ...
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Heston model using YUIMA package

I am trying to estimate a Heston model using the Yuima package, but i am in trouble. This is my script: ...
Luiz Araújo's user avatar
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Deriving central bank hikes/cuts from a swap curve

Can you please explain the following? Please assume I am 5 years old. how do you derive the cuts/hikes of the policy rate priced in a swap curve? why you can derive the cuts/hikes only from a swap ...
Finance_student's user avatar
1 vote
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140 views

Could a phoenix autocall be priced by a snowball option with zero coupon plus expectation of coupons received in knock out observation dates?

I know that coupons in the phoenix autocall can be received in each observation date if the underlying price in that date does not touch down the knock-in barrier and receiving periodic coupons is ...
Meraki's user avatar
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2 votes
2 answers
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Calculating DV01 for Treasury Futures with CTD switch risk

With rates rising, certain contracts, such as the USZ3, are prone to frequent CTD switches with sometimes large differences in the DV01 of an underlying CTD. Does anyone know of any resources for ...
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Monte Carlo methods: Choosing the best measure

When pricing derivatives using Monte Carlo methods, we take outset in the risk neutral pricing formula which states that we need to calculate the expected value of the discounted cashflows. To do this,...
Landscape's user avatar
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4 votes
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Balland - SABR goes normal

To summarise this very long post : please help me understand the undetailed proof of the quoted paper. I am not comfortable using a result I do not fully understand. I am reading Balland & Tran ...
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Carry for an Interest Rate Swap

I don't get why for calculating the carry of a spot starting swap I need to adjust the difference between the fixed rate and fixing by the Dv01? For example if I receive in a 5y swap and want to ...
Finance_student's user avatar
7 votes
4 answers
2k views

What is meant by the funding cost of a derivative?

Numerous sources refer to the 'funding cost' of a derivative. I'm confused as to exactly what cost is being referred to here. To illustrate my confusion, consider purchasing an uncollateralised OTC ...
Trent Di's user avatar
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