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Questions tagged [derivatives]

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

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option chain data visualization, sunburst

I think option chains are not represented in the best way. With more and more options products coming out and trading on the various exchanges, I see vendors struggling to keep up with a good way to ...
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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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Non attainable claim - Incomplete market

I am wondering whether there is a standard procedure to find a non attainable (i.e. non replicable) asset in an incomplete market. As an example, let us have the following market ($B = (B^1, B^2, B^3)$...
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Balland - SABR goes normal

To summarise this very long post : please help me understand the undetailed proof of the quoted paper. I am not comfortable using a result I do not fully understand. I am reading Balland & Tran ...
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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 ...
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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 ...
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Risk factors for derivatives on dividends

I consider pricing and risk analysis of derivatives on dividends of the members of equity indices (such as Dow Jones EuroStoxx). There are options but I focus on futures. What are the main risk ...
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Benth: Risk-neutral measure in incomplete markets

I am currently working on Benth and Benth "THE VOLATILITY OF TEMPERATURE AND PRICING OF WEATHER DERIVATIVES" and i am stuck at following paragraph at page 10, which is about risk-neutral ...
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Methods for tracking option open interest intraday

It is my understanding that open interest option values on financial websites are a reflection of a snapshot value each day. Is anyone aware of methods for estimating intraday open interest, or aware ...
skepticalforever's user avatar
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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 ...
Volume Man's user avatar
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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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Estimating Market Price of Risk

I need help with estimating market price of risk. Assume money market account and two risky assets which exposed to same two sources of risks follow process: $dM(t)=rM(t)dt$ $dS_1(t)=S_1(t)(\mu_1dt+\...
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Pricing of future options

I have the following question on futures options: There is a Black’s model, which is a variant of the Black-Scholes formula that is used to price stock options. The Black’s model prices future options....
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What models are used for pricing cliquet options (esp. for Asian Equity underliers)? How good is Bergomi model?

What are the most common models, actually used by trading desks for Asian underliers, for pricing cliquet options? I would like to know both - (1) the production model used for daily P&L, and ...
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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 ...
Irtza Ahmed's user avatar
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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, ...
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What are common parametric forms for VIX smiles?

It is common in SPX markets to fit smiles using Stochastic volatility-inspired and Surface stochastic volatility-inspired parametric forms introduced by Gatheral and Jacquier (2014). In VIX markets ...
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Brazil IR swaps and help with new holiday

Brazil has a pending new holiday that is expected to be official in the next month, for date Nov 20. Existing BRL interest rate swaps contracts have a clause that fixed accruals are not impacted by ...
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What is the scope of spot lags and spot dates?

In the context of interest rate derivatives, we often speak of the spot date. But of course, there is not a "the" spot date, because there are multiple spot dates, for example for different ...
Tom Anderson's user avatar
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How to apply a funded equity collar to illiquid stocks?

I investigate a specific case of the funded equity collar [1]. Let's assume that counterparty $A$ already has a stake in share $XYZ$ and wants to get funding out of it from a bank $B$, which does not ...
Acapulco's user avatar
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Hybrid Derivatives Modelling

Could you please recommend any good books and papers that thoroughly describe the pricing and modelling of Hybrid derivatives? I.e. this question is a "big list" question, the more 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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Are there any studies on the link between energy markets and hedging-strategies for Cryptocurrency mining?

Full Disclaimer: I first asked this question on Bitcoin.SE, however I feel like my question is more relevant to this site as there would be wider knowledge and insight of some better sources or ...
Hamish Gibson's user avatar
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What makes modeling interest rate derivatives very difficult compared to equity derivatives?

I understand while equity derivatives require the modelling of stock price at expiry, interest rate derivatives typically require modeling both the expiry and tenor, thus increasing the dimensionality ...
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Are rough stochastic volatility models used on the street for equity derivatives ? (2020)

I'm building out some stochastic vol models for pricing exotic equity derivatives. What's the state of the art on the street?
Pedro Mejor 's user avatar
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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 ...
Steven Price's user avatar
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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 ...
br0323's user avatar
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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 ...
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Delta Hedging Example

I was reading Dynamic Hedging by N. Taleb and in the chapter dedicated to the delta, there is this example of a trader position in options (one-month European call, flat yield curve, forward is ...
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What model do market makers in equity derivatives commonly use to price, hedge, and fit the IV surface?

What is the industry standard/common model used by market makers in equity derivatives to trade across the IV surface?
roz's user avatar
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Difference in utility of cap/floor and FRA

What is the difference in utility for cap/floor and FRA? To me their function looks very similar. Are they used for different objectives. One thing I know in difference is that the pay off for cap is ...
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Banks' use of written interest rate options

I study US commercial banks data. I look at the notional amounts of their different OTC interest rate derivatives for the recent years. When I look at non-dealer banks (i.e. end-users), I find that ...
user6441253's user avatar
2 votes
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187 views

Bates Model Jump Percentage Parameters

I am trying to calculate the jump parameters for the Bates volatility jumps, specifically, the mean of the jump percentages, $\mu_j$. For the value of $J$, I am using jumps $|\frac{s_{i}-s_{i-1}}{s_{i-...
Kevin K.'s user avatar
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How to determine expected returns of an options portfolio?

Lets say I have a delta neutral portfolio, iron condors on spy for example. I'm short a call credit spread and a put credit credit spread of equal widths. I would like to determine the expected ...
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Is there Carry Effect for Cash Settled Bond Future

As we know, physical settle bond future would expose carry effect which would be the deliverable bond coupon and your financing cost (cost of carry as a sum term). This is because it can be replicated ...
HoldBreath's user avatar
2 votes
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341 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 ...
sosa89's user avatar
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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 ...
John's user avatar
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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 ...
Skyly83's user avatar
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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 ...
Ajk's user avatar
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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}-...
user27797's user avatar
2 votes
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262 views

Derivative and Credit Risk Modelling

I am looking at acquiring a system to help with multi-instrument modelling. Across the spectrum Equity/FI/Swap/Repo/CDS/FxSwap/Forward/Future/etc for vanilla and more complex derivatives. The modeling ...
zatbusch's user avatar
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Literature to Learn about Different Instruments

What is a good source of literature to learn about the specifics of various instruments that are traded? For example, suppose I wanted to know more about MBS's, i.e. how exactly they are securitized, ...
Andrew P.'s user avatar
2 votes
0 answers
100 views

why many option contract price less than minimum boundary price?

I downloaded data from NSE(National Stock Exchange) website regarding closing price of European Call Option written on Index. From standard textbook, I read that option contract must satisfy $C(t) \...
Neeraj's user avatar
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Weighted average implied optionlet/swaptions volatility

Let an implied volatility curve/surface is made up by optionlets or swaptions Black's implied volatility. If you wanted to price, say, a FRN with cap and/or floor, a CMS et cetera you would input the ...
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FRA-Strategy: Make 3-month and 1-year Excess returns comparable

I am trying to analyze an investment strategy that tries to exploit the empirical difference between forward interest rates and realized spot rates. I am using FRAs to capture the difference. I am ...
Alex Schmitt's user avatar
1 vote
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Implicit function theorem and sensitivities to market risk for Nelson-Siegel-Svensson model

I’m calibrating the Nelson-Siegel-Svensson model to market rates and I’m trying to compute the sensitivities of the NSS parameters to those said rates: $$r\left(T\right)=\beta_{0}+\beta_{1}{\frac{\...
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Decomposition of Step-up swaps

is there a general procedure to decompose a fixed-floating interest rate swap, where the fixed rate changes period-to-period, into a basket of co-initial swaps, each with a different fixed rate? For ...
David's user avatar
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Could a phoenix autocall be priced by a snowball option with zero coupon plus expectation of coupons received in knock out observation dates?

I know that coupons in the phoenix autocall can be received in each observation date if the underlying price in that date does not touch down the knock-in barrier and receiving periodic coupons is ...
Meraki's user avatar
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How to properly weight fair value, theta, and cega in a multi asset model?

I'm working with a multi-asset worst of model and the outputs are FV,d1,d2,g1,g2,v1,v2,cega, theta. Its easy to assign proper delta, gamma, vega to the respective asset1 & asset2, but how would ...
vanilla_skies's user avatar
1 vote
0 answers
141 views

What is the optimal time for exercising American call and put option?

A 9 month American option (underlying) is known to pay dividend of USD 1 and USD 0.75 at the end of the ...
Sri nath's user avatar