Questions tagged [derivatives]
A financial contract whose payoff is linked to the evolution of an underlying security.
376
questions
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1answer
36 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 ...
0
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0answers
45 views
advantage of changing measure
I consider $$Z_n(k):= \exp\{c S^*_n- f(-c)n\}$$ with $f(k):=\log E(e^{kS_1})$ ,
$S_i=z+i-\sum\limits_{j=1}^iY_j$, $(Y_j)_j$ are i.i.d, $Y_j \in \mathbb{N}_0, z \geq 0$
and $S^*_i:=-S_i$
Define Esscher ...
-1
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0answers
58 views
What does hedging a structured note mean? Whom does it benefit? [closed]
I am learning to create structured notes for clients. For a reverse convertible note with a basket of underlying equities,providing a guaranteed coupon and having a European knock-in barrier, the ...
1
vote
1answer
118 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 £100 - Bob's order was also at 100x leverage.
Bob is 10 contracts short and Alice is 10 contracts long.
Both have a margin ...
2
votes
1answer
239 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 ...
3
votes
2answers
276 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 ...
1
vote
1answer
53 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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0answers
29 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
204 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 ...
2
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1answer
223 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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0answers
17 views
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 ...
3
votes
1answer
82 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 ...
1
vote
1answer
83 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 ...
1
vote
0answers
64 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 ...
2
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0answers
48 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 ...
0
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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 ...
0
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1answer
76 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 ...
0
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1answer
36 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 ...
5
votes
4answers
418 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,...
1
vote
1answer
194 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 ...
2
votes
1answer
115 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 ...
0
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1answer
54 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 ...
2
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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 ...
2
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0answers
56 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 ...
0
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0answers
33 views
Black model with negative strike price
Whats the issue if we try to price a swaption with a negative strike using Black model?
2
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1answer
140 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 ...
1
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0answers
49 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 ...
0
votes
2answers
86 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)...
0
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0answers
43 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 ...
1
vote
1answer
59 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
votes
0answers
28 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 ...
2
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1answer
122 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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0answers
45 views
Issue with solving American call option questions
Here are the questions:
I tried using DerivaGem, but I am not sure that I got the right result.
Here are my attempts at solving the questions:
a) Upper and lower bound:
Is it correct?
Not sure ...
0
votes
1answer
89 views
Extensive list of financial derivatives and what method is used to value them
What I'm imagining is a long list of different types of financial instruments traded on the market along with the model(s) that is industry standard for valuing it. Something like:
European equity ...
1
vote
2answers
227 views
What does the word “affine” mean in affine term structure models?
I am new to the field of Mathematical Finance and wanted to get an idea on the intuitive, physical and mathematical meaning of the term "affine" in Affine term structure models. Any literature ...
3
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5answers
528 views
bank issuing structured products
"The investment banks supplying structured products were effectively buying options from investors"
How to understand this quote from this source?
I would think the investors are usually had (long) ...
0
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1answer
37 views
Contingent Claim Bounds
In my course on discrete-time finance we derived the following equality for a lower bound for the value of a not necessarily replicable contingent claim $D$. Here we are looking at a single period ...
0
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0answers
41 views
Is Vega hedging a complex derivative self financing?
Let's consider an incomplete market where I am pricing a complex derivative (Say a Bermudan). I hedge vega by a vanilla option(S). Let's say at t=1 I want to re-hedge. However, I have no guarantee ...
0
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0answers
62 views
Types of financial derivatives
I am looking for an explanation for different types/grades of derivatives.
For example we have various asset classes:
equities
FX (currency)
derivatives, etc.
Or different types of secured debts, ...
1
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0answers
33 views
Fourier transform of price function
If the expiry value is given by $f(x,T) = e^{-c x}$ for $x \ge a$ and 0 otherwise and c is a +ve constant, prove that in the Fourier domain:
$$
(c + j \omega) F(\omega, 0) = e^{-rT} e^{-a(c+j\omega)}...
0
votes
1answer
106 views
What to do if certain parameters are not market observable?
Lets say I have no clue on correlation between 2 equities in the market (i.e. i don't have an observable market price). What is the best way to go about marking this correlation for lets say the best ...
0
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1answer
65 views
Equal prices for call and put options with symmetric strikes around contemporaneous price?
Shouldn't (according to the Black-Scholes model) the price of a call option with a strike of an arbitrary amount away from the current asset's price, be equal to the price of a put option with the ...
2
votes
1answer
91 views
Callable Total Return Swap pricing
I need to price a callable Equity Return Swap by Accrual. ERS has property callable T+1 and I don't get it. Does it mean that when a call happen we fix a price that and pay Accrual the next day? Could ...
1
vote
0answers
14 views
Balance sheet items which might show exposure to hedging or the prevalence of forward contracts
I do have a panel data set on North American companies from Compustat covering balance sheet and income information. I am wondering if there is a possibility to use a balance sheet variable as an ...
0
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1answer
109 views
Calculate Third Order Greeks Options
Hope you're doing great! I'm struggling to develop the code for the Third Order Greeks.
In all places I have searched, the development is missing.
For example:
But I don't know how to develop it, ...
6
votes
2answers
163 views
Radon Nikodym derivative when changing numeraires
I note from Wikipedia that if $Q$ and $Q^N$ are two measures corresponding to numeraires $M$ and $N$, then the Radon Nikodym derivative is given by: $$\frac{dQ^N}{dQ} = \frac{M(0)}{M(T)}\frac{N(T)}{N(...
0
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0answers
29 views
Models for derivative portfolio composition
I focus on interest rate derivatives. I am looking for theoretical references which would model how financial institutions optimally choose among the different types of existing instruments (options, ...
0
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1answer
43 views
Synthetic FRAs using Eurodollar futures
In order to create a synthetic FRA position of 30-day FRA on 90-day LIBOR, the diagram below shows that we can enter into positions by going long a 120-day Eurodollar contract and short a 30-day ...
1
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1answer
34 views
The NA price of a caplet with payoff
Prove the following statement:
The NA price of a caplet with payoff
$$\delta \cdot (L(T;T,T+\delta)-k)^{+} $$
at time $T+\delta$ equals the NA price of a put option with the payoff
$$(1+\delta \cdot k)...
0
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0answers
29 views
Bond CSA hedging risk
If I have a CSA that contains say GBP Gilts and GBP cash, how do i hedge the risk that the gilt funding cost goes up.
Lets say my portfolio is > 10 years.
Let's assume I have a discount curve that ...
