Questions tagged [derivatives]

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

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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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33 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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96 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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43 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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1answer
368 views

Exercise Probabilities Vanilla Cap/Floor

When looking at the discounted pay-off formulas of a vanilla caplet and a vanilla floorlet $\frac{\Delta\tau}{1+r_k\Delta\tau}\max(r_k-r_{cap},0)$ $\frac{\Delta\tau}{1+r_k\Delta\tau}\max(r_{floor}-...
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69 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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1answer
53 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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43 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 ...
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1answer
42 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
81 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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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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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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278 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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54 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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74 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 ...
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124 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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94 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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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+\...
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2answers
112 views

Bid Price of a Forward?

Say I am a market maker. The ask (me selling it) formula is pretty common in textbooks etc by no arbitrage: $$F = S \cdot \text{exp}(r-d)$$ where $r$ is interest rate and $d$ -- dividend. Again, by no ...
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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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61 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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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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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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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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Barriers on structured notes

I asked a question here: Structuring and Customization Thanks to all the contributors. However, I now have a follow-up question. I would like to buy barrier options and I was informed from that post ...
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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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Implied cross currency curve

For EM countries without a liquid xccy curve, how I can imply it from local government bonds or swaps?
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187 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 ...
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279 views

Structuring and Customization

It seems complex derivatives in particular exotic options are not available at any retail broker. Can a regular retail trader get access to these instruments? Maybe through prop firms or banks? ...
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How does the underlying get delivered for electricity market derivatives?

I have been reading around energy markets recently and recent schemes such as Voluntary Carbon Markets, similar to the 'cap and trade' style of the Kyoto Agreement in 1997. I have been reading in ...
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Pricing of a barrier reverse convertible in python with monte carlo simulation

I'm a finance student and try to do the pricing of a given barrier reverse convertible. This has to be done by a Monte-Carlo-Simulation in Python. The underlying is a stock of ING Groep N.V. Strike ...
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Innovative ways of visualizing financial data

Finance is drowning in a deluge of data. Humans are not very good at comprehending large amounts of data. One way out may be visualization. Traditional ways of visualizing patterns, complexities and ...
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1answer
89 views

Martingale proof: Call-prices must be increasing in maturity

I have observed that IV is increasing with time to maturity by using market prices and plotting IV (from Black-Scholes) against log-moneyness, $\log(S_t/K)$. $S_t$ being the price of the stock at time ...
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1answer
71 views

Show that the price of a LIBOR rate paid in advance is a linear combination of caplets

Let $L(t, T_1, T_2)$ be the forward LIBOR rate at time $t$ for the period $T_1$ to $T_2$. If a security pays some multiple of $L(T_1, T_1, T_2)$ at time $T_1$, how can we show that the price of this ...
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Higher Capital and margin requirement for bilateral Non-central cleared OTC Derivatives

The OTC Derivatives reforms after Global Financial Crisis include higher capital and margin requirement for bilateral traded OTC derivatives? I have the followings questions: The higher capital ...
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1answer
27 views

Valuing Conditional "All Or Nothing" Multi Asset Options

I would like some insight as to how to value modified rainbow options on multiple assets: For example: A multi asset option, Call GOOG with $S_t$ \$1600 that you may exercise if and only if you also ...
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1answer
371 views

Risk Neutral Valuation, Drifts and Calibration

Lets consider a pricing model like Vasicek. Apparently, if you calibrate a derivatives pricing model to market prices this gives you risk neutral parameters. Its not clear to me as to WHY this will ...
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1answer
60 views

Bachelier call option derivative w.r.t strike

I tried to take the partial derivative of the Bachelier call function w.r.t. strike price K (eqn 2.2 here), but my result is not lining up with what is shown on page 43 here.
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FX hedged investments

I was reading FX hedged investments do not have an impact on the FX rate. For example, a Japanese fund buying US treasuries fully FX hedged. I understand the hedging is usually done through short term ...
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109 views

Hull on Futures: I am not able to understand this sentence

The usual rule chosen by the exchange is to pass the notice of intention to deliver on to the party with the oldest outstanding long position. ...
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1answer
193 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 ...
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Futures positioning reported by CFTC

How is the net futures position calculated by the CFTC? For instance, GBPUSD net contract is positive in the CFTC report, what does it mean given that for each buyer there is a seller?
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Margin Requirement model for CCP and non-central cleared OTC derivatives

What the models for computing margin requirement for central counterparty (CCP) and non-central cleared OTC derivatives.
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1answer
69 views

India's FX foward market

https://www.bloomberg.com/news/articles/2021-05-04/india-asks-state-banks-to-protect-dollar-assets-on-cairn-concern Based on this article USDINR forward premium has spiked as there is abundant USD ...
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2answers
488 views

Differences between main classes of interest pricing derivatives models

There seems to be 3 main classes of interest rate pricing models: 1) Short rate models, 2) Heath Jarrow models and 3) Libor Market Model. My book doesnt seem to explain why we need all these different ...
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1answer
148 views

How to convert CDX spread to price?

Example: assume the current HY CDX is with 5% coupon. The spread is around 300bps, with a duration of around 4 years. Would you pls help me to understand why we can proxy the HY CDX price as 100+4*(5%-...
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1answer
290 views

FX Options price vs implied vol

From the screenshot below, what is the difference between the option price by strike in the table versus the implied volatilities by delta in the chart at the bottom? https://www.investing.com/...
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144 views

Currency trades

I usually read statements as the below: "Bank A recommends long positions in the yuan against the Singapore dollar" How are these trades usually implemented? Borrow SGD and convert into CNY (...
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1answer
137 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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Commercially redistributable derivative market data source

Is there any derivatives market data source that gives permisson to use this data in a financial model and then sell a product with it? (derivatives valuation for example) I'm looking for a cheap ...

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