Questions tagged [derivatives]
A financial contract whose payoff is linked to the evolution of an underlying security.
0
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0answers
34 views
Random walk with continuous deterministic dividend [on hold]
I am studying the basics of quant finance, and stumbled upon the SDE of a stock price with continuous dividend yield (Wilmott, Equation 3.19):
$dS=\sigma S dX+(\mu-q)S dt$
Wilmott says that the ...
4
votes
1answer
78 views
What is the purest way to get exposure to Jump risk premia, is there a jump swap
So to get exposure to Variance risk premia one could use variance swaps, is there a equivalent security for jumps. Hedging against jump but not diffusion risk could allow one to take targeted exposure ...
3
votes
0answers
49 views
Two barrier options puzzle
I come across an interesting question about barrier option as shown below.
Two barrier options are given with the same parameters including the barrier level. The first one is knocked out when it ...
1
vote
1answer
33 views
Should one calculate CVA even when exposure is negative?
I have an example, where two companies have the bilateral nature of derivative contract. Companies have exchanged collateral a number of times, so at a certain point in time each sides holds some ...
3
votes
0answers
47 views
How to Compute the payoff of Var Swaps, which I have replicated
I used Derman(1999) method, to calculate the fixed Kvar for Variance Swaps using actual option price data. The first Pic Shows the outcome. (ignore the 0s).
Now the profit and loss of short var swaps ...
8
votes
1answer
132 views
Derivation of VIX Formula
I've read a lot of derivations about VIX formula. I can say it is -adjusted- fair strike of variance swap. But I can't see how it goes from variance swap rate to VIX formula. In particular I can't see ...
3
votes
2answers
52 views
Cash vs Deposit Rates
When constructing a yield curve for derivatives purposes, what is the difference between cash and deposits rates?
5
votes
1answer
109 views
CMS Pricing - Convexity Adjustment by Replication [closed]
I'm trying to learn CMS pricing, but didn't get the logic of this method. Previously cited articles about this method is pretty complex.
I'd be glad if you can provide me with simpler articles or ...
1
vote
0answers
67 views
Derivative of the stock price and volume at time t
According to Forecasting of Jump Arrivals in Stock Prices: New Attention-based Network Architecture using Limit Order Book Data at page 9, I would be interested in deriving the the price (ask and bid ...
1
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0answers
61 views
pricing of futures
When pricing futures with the cost of carry model; When do you use continuous compounding and when do you just use simple compounding? AND WHY?
Also, when deriving proof of no arbitrage with the cost ...
1
vote
0answers
35 views
FX Average Forward Pricing
Lookin for documentation on how to price FX Arithmetic Average Rate Forwards.
Couldn't find any info on textbooks.
Any help is very appreciated.
1
vote
3answers
101 views
Commodity Asian Swaps
I'm trying to find info about asian swaps on oil/energy products and about their pricing methods.
However, all I could find are on asian options.
Would be glad if you can provide me with some ...
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votes
0answers
18 views
ISSUER data for a reference data management system [duplicate]
we are building a reference data system from scratch.
I am planning to use the bloombeg issuer equity ticker to download the information on the issuers.
However, I dont seem to find issuer data for ...
2
votes
2answers
60 views
Arbitrage-free calculation of flat term structure out of normal term structure for e.g. pricing european options
since e.g. the Black-Scholes model requires a constant interest rate (flat term structure) but the real world often has normal term structure, I was wondering if it is mathematically correct to
...
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votes
1answer
86 views
how to derive the cost of carry formula
Can anyone explain why the cost of carry formula looks like this:
$$F_0 = S_0 \cdot e^{(c-y)T}$$
,where $S_0$ equals the spot price when $T=0$, i.e. today. $c$ denotes the cost of carry and $y$ the ...
2
votes
2answers
181 views
How is volatility different from variance?
I always thought volatility was just variance ^ (1/2). Now I'm reading this book and it's saying that the two are different concepts. Excerpts include:
Partly due to its use in Black-Scholes, ...
1
vote
0answers
42 views
Monte Carlo VAR with differente asset classes
I have found a very useful post regarding the use of Monte Carlo simulaton to obtain portfolio Value at risk, based on Cholesky decomposition, random variates, etc. This post I'm talking about is: Is ...
4
votes
1answer
58 views
Discounted asset price is martingale in BS model
I want to verify that the discounted stock price process $\mathrm{e}^{-r(T-t)}V(S_t,t)$ is a martingale in the BS-model. Using Ito's formula and the BS-PDE I get that
$$
\mathrm{d}\mathrm{e}^{-r(T-t)}...
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1answer
83 views
Why can derivatives be viewed as a portfolio of the underlying and the riskless asset?
I am struggling with the statement:
"Every derivative of the underlying can be viewed as a portfolio of the underlying asset and the riskless asset."
Is this based on the put-call parity?
Also I ...
2
votes
1answer
49 views
Variance Swap : dividends and rates
In a simplified world you can assume that the var swap is replicated by a continuous set of calls and puts and interest rates are equal to zero. So your PNL is only sensitive to the volatility.
But in ...
3
votes
1answer
59 views
Determining cost of carry for a future in Euronext.com [closed]
A snapshot from the trading book of the CAC 40 futures, on November 5 2018, is:
Using the book prices, how can I compute the cost of carry implicit in the November and December contracts?
Please ...
0
votes
1answer
98 views
How is the performance measure computed here?
The image is from John C Hull Textbook titled Options, Futures and Other Derivatives ( page 407 - Ninth Edition). The table above was obtained after computing the delta of stock price, shares ...
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2answers
146 views
Proof Black Scholes Theta
I saw the following proof of theta in a paper I read, and I thought it looked pretty neat. Unfortunately I don't understand the step that they do.
This is what they do:
Now, I don't get how they go ...
1
vote
1answer
45 views
Static hedge forward swap using zero coupon swaps
I'm trying to create a static hedge for a forward swap using two spot starting zero coupon swaps (to prove that there is no convexity adjustment needed). Here are the instruments -
Paying fixed in ...
2
votes
1answer
97 views
How are Interest Rate Swaps Quoted
Im not sure if this is the right place to ask this question or whether Personal Finance & Money would be a better place. Basically I know that initially interest rate swaps are quoted based on the ...
1
vote
0answers
149 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 ...
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votes
2answers
53 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
34 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
votes
1answer
91 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
votes
0answers
96 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
votes
1answer
278 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
votes
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 ...
3
votes
2answers
414 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 ...
2
votes
1answer
109 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 ...
0
votes
1answer
247 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?
-2
votes
1answer
28 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
vote
1answer
129 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 ...
2
votes
1answer
60 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
votes
2answers
354 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
vote
1answer
134 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
votes
0answers
187 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, ...
1
vote
0answers
101 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
votes
1answer
438 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 ...
3
votes
0answers
73 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
votes
2answers
297 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
votes
2answers
877 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
votes
0answers
400 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 ...
-1
votes
2answers
39 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
135 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
votes
1answer
108 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)]$$
$$ ...
