Stack Exchange Network

Stack Exchange network consists of 175 Q&A communities including Stack Overflow, the largest, most trusted online community for developers to learn, share their knowledge, and build their careers.

Visit Stack Exchange

Questions tagged [derivatives]

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

2
votes
2answers
186 views

How is volatility different from variance?

I always thought volatility was just variance ^ (1/2). Now I'm reading this book and it's saying that the two are different concepts. Excerpts include: Partly due to its use in Black-Scholes, ...
15
votes
1answer
794 views

Stochastic modelling of 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 common stochastic ...
2
votes
1answer
549 views

Which models do Bloomberg/Reuters use to derive implied volatility for interest rate derivatives with negative forward rates?

can anybody tell me which models Bloomberg and Reuters ares using to derive implied volatility for interest derivatives with negative forward rates? I know that Black-76 is the standard model, and ...
0
votes
1answer
245 views

Exercise Probabilities Vanilla Cap/Foor

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}-...
-1
votes
1answer
1k views

Compute I-spread from ASW-spread (or vice versa)

The I-spread ("mid swap spread" or yield-yield spread) is a standlone measure of credit risk, a security against matched maturity vanilla swap rate. Consider a package in which the investor receives ...
-1
votes
1answer
1k views

Calculating arbitrage- S&P 500 stocks vs S&P 500 Index future?

How exactly would I go about investigating whether the S&P 500 stocks were currently over-valued compared with the price of the S&P 500 Index futures contract? Is it just a case of taking each ...
9
votes
0answers
1k views

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 ...
4
votes
0answers
76 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
0answers
161 views

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 ...
3
votes
0answers
51 views

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 ...
3
votes
0answers
47 views

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 ...
3
votes
0answers
219 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, ...
2
votes
0answers
102 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 ...
2
votes
0answers
426 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 ...
2
votes
0answers
129 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 ...
2
votes
0answers
63 views

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, ...
2
votes
0answers
86 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) \...
2
votes
0answers
293 views

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 ...
2
votes
0answers
85 views

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 ...
1
vote
0answers
69 views

Derivative of the stock price and volume at time t

According to Forecasting of Jump Arrivals in Stock Prices: New Attention-based Network Architecture using Limit Order Book Data at page 9, I would be interested in deriving the the price (ask and bid ...
1
vote
0answers
63 views

pricing of futures

When pricing futures with the cost of carry model; When do you use continuous compounding and when do you just use simple compounding? AND WHY? Also, when deriving proof of no arbitrage with the cost ...
1
vote
0answers
35 views

FX Average Forward Pricing

Lookin for documentation on how to price FX Arithmetic Average Rate Forwards. Couldn't find any info on textbooks. Any help is very appreciated.
1
vote
0answers
48 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 ...
1
vote
0answers
222 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 ...
1
vote
0answers
106 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 ...
1
vote
0answers
61 views

The interpretation of discounted Greeks

I understand that Delta measures the rate of change of the theoretical option value with respect to the change of the underlying asset price. This also represents the number of shares a call option ...
1
vote
0answers
59 views

Solving for roots of a stochastic pay-off function

I have a pay-off function for a derivative which is defined by the Heaviside difference between $G$ and $B$ shifted by $-F$. To find the value of $V_{t=0}$, I need to find $\tau$ when $\frac{dV}{dt} = ...
1
vote
0answers
40 views

Boundary condition of lookback option

This is a well know conclusion of the boundary condition of lookback option. Here $$\dfrac{d S_t}{S_t} = (\mu - D)dt + \sigma ...
1
vote
0answers
32 views

Floor option EVE risk: Sum of key rate shocks risks vs. the rates parallel shock risk

Consider a model measuring the EVE risk (change in the economic value by shocking the rates; PV01) of a portfolio of vanilla interest rate floor options. Is there any reason for the EVE risk of a ...
1
vote
0answers
136 views

Valuing cleared cancellable swap

I have a cancellable swap to value, with the float leg payer being a clearing house. The cancellable term sheet states the interest rate swap has a Bermudan style optionality for early termination ...
1
vote
0answers
292 views

Funding Valuation Adjustment (FVA) - understanding issues

Having trouble with understanding the logic of FVA. Let's assume that as a trader I trade with a client an uncollateralised fx forward. Then, I hedge my position with "risk-free" bank with which I ...
1
vote
0answers
47 views

References on Pricing commodity forwards

Any good reference on pricing simple forward contracts with source code? Thanks
1
vote
0answers
77 views

Scaling Stock Price and Strike etc. by a Constant

Please provide steps to justify the below. 1) If the stock prices, strike and other price related parameters are scaled by the same constant, will the derivative price scale accordingly? I would ...
1
vote
0answers
75 views

Fair Price CDS Spread for a Bank

I have been using CreditGrades to calculate fair one year CDS spreads for firms. However, the authors of the model explicitly say that the model does not hold for banks or financial firms. If I need ...
1
vote
0answers
143 views

Understanding Price Elasticities in Discrete Choice Models (Derivative)

I'am in the midst of a paper on mutual fund product differentiation by Li and Qiu. Here, the authors model the utility an investor derives from investing in a mutual fund using a Discrete Choice Model ...
0
votes
0answers
35 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. ...
0
votes
0answers
96 views

Pricing of Swaption by Proxy and Monte Carlo

here's the problem. Suppose you want to compute the price of a Call option on a Swap contract. Let $T$ and $T+S$ the times (in year fraction) where the Swap lives and suppose that the fluxes of the ...
0
votes
0answers
368 views

What is the intuition behind the equivalent martingale measure result?

"Suppose that f and g are the prices of traded securities dependent on a single source of uncertainty and define phi = f/g. The equivalent martingale measure shows that, when there are no arbitrage ...