Questions tagged [derivatives]

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

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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 ...
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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: 𝑑𝑆=ln(πœ‡)𝑑𝑑+ln(𝜎)𝑑𝑧 The Ito process has to be derived for S_t in the interval (t_1,t_2) Thanks!
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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 ...
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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 ...
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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 ...
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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 ...
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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?...
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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, I’ve been looking for some approaches for estimating a ...
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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 ...
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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 ...
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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 ...
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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 ...
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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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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 ...
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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?
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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 ...
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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
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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
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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 ...
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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'...
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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
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
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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,...
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
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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?
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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 ...
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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 ...
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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)...
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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 ...
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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
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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 ...
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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 ...

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