Questions tagged [derivatives]
A financial contract whose payoff is linked to the evolution of an underlying security.
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Clarification on how synthetic CDOs work
According to my understanding, synthetic CDOs are essentially credit default swaps (CDS) for a bunch of loans, stored in a special purpose vehicle (SPV). Here, the investor (the one who buys the ...
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85 views
How does $(d_2/\sigma) = (1-d_1)$ while deriving the Vanna Formula from BSM? [closed]
Just realized there was a quant finance board, so I figured I'd post it here instead.
I'm trying to derive Vanna from the Black-Scholes Model (BSM) equation, but had a hook up on one of the ...
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59 views
Discounting power derivatives
My question is whether power/energy derivatives should be discounted or not. I've heard both yes and no from practitioners but I still don't have a strong or clear opinion about it.
Derivatives are ...
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38 views
Assymetric Rate Distribution
The pandemic has disavowed any notion of nominal rate distributions to being truncated at 0%. However, if Central Banks at Debtor nations are conflicted in that they are incented to suppress interest ...
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1answer
67 views
Why Do I Need to Scale Options Vega w.r.t T (Time till Expiration)
In the book that I am using, it said that I need scale vega according time with this formula: $\sqrt{90/T}$ to get the weight of the vega w.r.t t. The reasoning it offered is as follows:
"...
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1answer
75 views
Understanding the expected value of the average
I've been looking into Asian Options pricing. Part of the process is about looking for the expected value of the average of a time series undergoing e.g. geometric brownian motion.
I came across this ...
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1answer
67 views
Limit of digital call and put price when volatility goes to infitiny
The price a digital call and put in the Black-Scholes model is given by
$$c^d = \Phi (d_-), \qquad p^d = \Phi (-d_-), \qquad \text{with} \qquad d_- = \dfrac{\log S_t / K}{\sigma \sqrt{T}} - \dfrac{1}{...
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1answer
60 views
Risk-neutral pricing to determine no-arbitrage price
We are asked to consider a derivative with payoff $C_t = S_{T}^{1/3}$ at maturity $T > 0$ and to use risk neutral pricing to derve the no-arbitrage price process $C_{t}$.
Some context:
Let $W$ be a ...
2
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1answer
195 views
Value of contingent claim at a given time
Consider a contingent claim whose value at maturity T is given by
$\min(S_{T_0}, S_T)$
where $T_0$ is some intermediate time before maturity, $T_0 < T$, and $S_T$ and $S_{T_0}$ are the asset price ...
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0answers
76 views
Determine Strikes on Option Chain
Does anyone know how to determine option strikes on an option chain are determined for a specific stock?
I have been searching online and can't seem to figure out how/why the specific strike are set.
...
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35 views
What does M mean in DI Deposit futures contract?
I am trying to understand the forumla for DI1 Brazilian deposit future contract. I am able to figure out everything except M in the following formula:
Xt=N×M×(Pt−Pt−1Ft)
Lets say if we want to ...
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0answers
173 views
Seeking criticism of model assumptions
I have been trying to publish a new calculus and options model for seven years. I have been consistently desk rejected, so what I am trying to do is get criticism of my assumptions because they ...
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1answer
119 views
Do put options experience theta/time decay?
I'm new to quant finance, and I'm confused as to whether or not European put options experience theta decay? It doesn't make sense to me that they should for a couple reasons outlined below, but ...
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0answers
50 views
Calibrating the mean reversion parameter of the short-rate-model Black-Karasinski
When modelling the term structure of interest rates, one widespread possibility is using the Black-Karasinski(BK) model, which is given by the following stochastic process
$$dln\,r=[θ(t)−a\,ln\,r]dt+σ(...
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35 views
QuantLib python: CAD IRSwap Conventions [duplicate]
The standard Canadian interest-rate swap convention for the float leg is payment frequency of semi-annual with reset frequency (CDOR3M) of every 3-months. It is not apparent this convention is ...
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2answers
152 views
Quantlib USDLibor() method
I'm attempting to shift both a discount and projection curve but am having trouble passing through the VanillaSwap() because of the Ibor input requirement -- I'm trying to calculate the dv01 of a US ...
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0answers
75 views
Why would one need forward prices to perform derivatives pricing?
I am trying to understand the purpose of inputs the software of my company is using. Amongst others it needs calibration instruments, a model type, initial values of the respective underylings and a ...
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0answers
29 views
Arithmetic Asian options on two commodities
I am pricing a November-December Asian option on steel via Monte Carlo simulation. I intend to simulate daily prices for the Nov contract from today through end of November, and from today through end ...
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1answer
109 views
Why should the Discount Curve be risk-free?
I have read up about the discount curve that is being used to value securities. The multi-curve methodology for valuing derivatives was mainly adopted because LIBOR was no longer seen as a proxy for ...
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0answers
47 views
Reference request (Risk Management + Insurance Theory) [duplicate]
I have to study the following topics:
Market and credit risk assessment models
Technical risk assessment models: non-life and life
Models for the valuation of bonds and for the determination of the ...
0
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2answers
62 views
How to trade on whether one asset will be higher than another?
I was wondering if there is any way to trade on whether or not one asset would earn a higher return than another in some predetermined time period. It would be sort of like gambling on horses except ...
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0answers
60 views
Vega of derivative when volatility is stochastic?
What is Vega for a derivative when the volatility of the underlying asset stochastic process itself?
When the value of the derivative is $V_d$ vegais $\partial V_d/\partial\sigma$. Consider for ...
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1answer
125 views
Pricing interest rate derivatives
In Sec. 3.2 here, Mandel deduces the price $P$ of a derivative on an interest rate $r$ obeys a PDE of the form$$\frac{\partial P}{\partial t}+\frac{1}{2}\beta^{2}\frac{\partial^{2}P}{\partial r^{2}}+\...
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0answers
22 views
Derivative balance sheet data for Eurozone banks
As a follow-up to my recent answer, is there a similar banking regulatory form such as USA’s FR Y-9C or FFIEC 101 at Eurozone level? National data level would be useful too. Data should be reported at ...
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2answers
174 views
Requesting for price?
Just for education purpose. Assuming I have some trading ideas that involves the use of OTC derivatives but I may not be able to put them into practice due to regulatory issues and huge minimum ...
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0answers
55 views
Is there an analogous strikeFromDelta implementation for 1st gen barrier options?
I have a simple replication pricing implementation for 1st gen exotics (digitals, single and double barriers, etc.). In order to effectively test strategies I want to price "like" strikes ...
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0answers
59 views
Name for option valued by a time difference
Is there a name for an option whose value is determined by a time difference?
I mean a derivative whose contract reads something like, "If stock $X$ goes below $Y$ at time $T_1$, and $T_1$ is ...
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1answer
40 views
How to price a set of cashflows from which the buyer can choose one?
Lets consider an arbitrage free and complete Model.Let also focus the analysis on the discrete time setting.Assume you have a finite set of random Cashflows $\mathcal{A}$. That means all elements of ...
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1answer
136 views
What is delta of an option signaling?
In an interview I was once asked what the delta of an option was and my answer started from the fact that it is the first derivative of the option with respect to the price, and then I concluded ...
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0answers
59 views
Finite difference methods with discontinuity in the payoff function
I have implemented a finite difference scheme for pricing options using a Black-Scholes-like model. I tested my implementation on a call option, and found that it gave extremely inaccurate results. I ...
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0answers
45 views
How to price a risk reversal for common dice gain with chance to re-roll
I was just thinking about an extension to the common dice throwing interview expected value question:
Question: Imagine a game where you throw a die and get a payoff equal to the number shown by the ...
0
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1answer
72 views
Computing VaR in a Monte Carlo simulation (question from Joshi's book)
I am studying Joshi's book on C++ for derivatives pricing. I am at chapter 5 on implementing a statistics gatherers class to use in a (simple) MC routine for pricing vanilla options, where it is ...
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1answer
135 views
Show that a forward starting option has 0 delta, and no sensitivity to volatility until the strike is determined
I need to show that the payoff:
$([(S_{T2}-S_{T1})/S_{T1}]-k)^+$
a. Has 0 delta
b. Has no sensitivity to quadratic variation of the underlying till $T_1$
Additionally, I would like to know for what ...
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1answer
56 views
In which scenario would we end up with more than one $\mathbb{Q}$ after calibrating an incomplete model?
Reading the literature I see that quite an effort is made to price derivatives in an incomplete setting. I see stuff like efficient hedging, indifference pricing, choosing $\mathbb{Q}$ by considering ...
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0answers
37 views
Are there any equity derivative instruments offering exposure to borrow rate optionality?
Just what the question says. I understand lots of equity derivatives have secondary exposure to stochastic rates, but I would like to understand if there is a payoff that has borrow rate as one of its ...
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0answers
96 views
Is completeness of a financial model relevant for derivatives pricing?
If a market model is complete then every derivative has a unique arbitrage free price. However we are not starting with a model but with a arbitrage free Model class $\mathcal{M}$ (E.g. the ...
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2answers
289 views
Cash settled contracts price convergence at expiry
I am aware why the price of the underlying security/commodity and its futures contract price would converge at expiration, i.e. if the underlying price was lower than the futures price, an arbitrageur ...
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2answers
62 views
Mini Nikkei Futures Contract - Tick and Point Value
for the Mini Nikkei Futures Contract traded at the Osaka Japanese Exchange, it states that the Tick Value is 500 Yen per Tick. But the actual contract is quoted in 5 Point Increments. Is the correct ...
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1answer
98 views
Using a Swap curve to price Interest rate Swaps
Say we have a 3-m LIBOR IRS (interest rate swap) with quarterly fixed payments (2 year contract), and we want to value this contract (after say 6 months has passed, i.e. there remain 1.5 years to ...
0
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1answer
118 views
How to value a long term interest rate swap if the floating leg is USD-LIBOR
To value an IRS, you require a spot/zero curve. If I am correct this zero curve will be the USD-LIBOR curve. However, if you have e.g. a 10-year swap that you are trying to value 2 months into the ...
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0answers
64 views
Calibrate 1-factor Gaussian HJM model on forward rates and ATM caps prices
I'm trying to solve the following problem as a part of the Interest Rate Models course
The algorithm that I'm following is
derive simple rates from the given forward rates via $L(0, T_i) = \frac{(1+\...
0
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2answers
98 views
Does someone lose money when I earn money on warrants?
My question is very simple. Does someone lose money when I earn money on warrants? I have tried searching the web but found nothing. I'm guessing the answer is yes. Also this is my first time here. Is ...
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0answers
63 views
Shouldn't duration be adjusted?
On August 1 a portfolio manager has a bond portfolio worth $10 million. The duration of the portfolio in October will be 7.1 years. The December Treasury bond futures price is currently 91-12 and the ...
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0answers
66 views
Model independent (or reasonable assumption) bounds on OTM put price given an ATM call price
I am looking for model independent (or weak/reasonable assumption) bounds on price of a OTM vanilla put on strike $k1$, conditional on an observable price for a ATM call at some strike $k2$. I ...
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0answers
53 views
How can we argue that the "economic" risk-neutral argument doesn't introduce arbitrage?
I am wondering why when use the "economic" risk neutral argument, we don't introduce arbitrage. By "economic" I mean an argument that doesn't use stochastic calculus or equivalent ...
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1answer
87 views
Data sources on derivative book composition for large investment banks
Is anyone aware of a data source for the composition of the derivative books across asset classes for large investment banks?
As an illustrative example with dummy figures, this could be a database or ...
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0answers
49 views
Is the initial value of the portfolio replicating a forward zero?
This is from the book Financial Calculus: An Introduction to Derivative Pricing by Martin Baxter.
By choosing appropriate weights in a portfolio of a stock and cash bond you can replicate the payoff ...
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1answer
144 views
Deriving the Heston-Hull-White PDE
I'm trying to derive the Heston-Hull-White PDE. The correct backwards PDE is equation (1.3) of this paper on page (2). I will begin deriving the forward PDE, but switching between the two is trivial.
...
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36 views
How to calculate net exposure on a Interest Rate Swap (and on derivatives in General)?
I would like to know how to measure Exposure on swaps (IRS, TRS...) in general .
Example, if a party A has a OTC position of 100 million USD in IRS with party B, is party A exposure = 100 million ...
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0answers
69 views
Implied cross currency curve
For EM countries without a liquid xccy curve, how I can imply it from local government bonds or swaps?
