Questions tagged [derivatives]
A financial contract whose payoff is linked to the evolution of an underlying security.
2
votes
1answer
41 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
54 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
92 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 ...
0
votes
2answers
95 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
29 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
71 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
48 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 ...
0
votes
2answers
50 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 ...
0
votes
0answers
29 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
87 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
78 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
136 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
258 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
votes
1answer
85 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
152 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
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
vote
1answer
102 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
52 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
243 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
94 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
163 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, ...
0
votes
0answers
403 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
vote
0answers
79 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
291 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
65 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
216 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
604 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
308 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 ...
0
votes
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 ...
-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
104 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
88 views
Black 1976 caplet value
I've seen from two sources different formulas for the caplet value (Black 1976):
$$Caplet_1 = N\cdot DiscountFactor_{0,k}\cdot yrFrcn_{k,k+1}\cdot [F_{k,k+1}\cdot N(d_1) - R_k\cdot N(d_2)]$$
$$ ...
1
vote
1answer
268 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 ...
0
votes
0answers
45 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 ...
0
votes
1answer
398 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
156 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 ...
0
votes
1answer
108 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.
...
0
votes
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 ...
1
vote
1answer
346 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
vote
1answer
251 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}$$ at maturity, where $...
4
votes
1answer
112 views
Books/papers on Insurance Derivatives?
I am looking to learn more about insurance-linked securities. I work for an insurance company and am interested in catastrophe risks and cat bonds.
I have a good statistical background and master-...
1
vote
2answers
1k views
What is the difference between funded and unfunded derivative?
What is the difference between funded and unfunded derivative?
Can anyone explain the difference between these two?
1
vote
1answer
168 views
Quantlib: Getting error trying to price a Swap
I have bootstrapped my curve based on end-of-day data for 24th Nov, 2017
I am then using that to price a off-market swap as below:
...
1
vote
1answer
274 views
Books about Monte Carlo Simulation on derivatives with Python
I am looking for a good reference for Monte Carlo simulation applied to derivatives with Python. Most books I found until now deal with C++... I have found "Derivatives Analytics with Python" by Yves ...
2
votes
1answer
157 views
Binary option analytical formula
Given $r=0$, $\sigma(K)=\text{const}$ and:
$$ \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
votes
2answers
284 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
vote
1answer
170 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?
1
vote
1answer
91 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
votes
1answer
218 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 ...
