Questions tagged [derivatives]

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

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499 views

Commodity Asian Swaps

I'm trying to find info about asian swaps on oil/energy products and about their pricing methods. However, all I could find are on asian options. Would be glad if you can provide me with some ...
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4k views

Long/Short Vega and Option Positions

Why do you get long vega when you buy an option and short vega when you sell an option? I would have thought that for both buying and selling options the vega would change according to whether the ...
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3answers
240 views

What is the name of this product?

Consider the payoff =$S_T1_{S_T>K}$ where $S_T$ is the asset price at maturity. What is this type derivative called? and is it a liquid option?
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102 views

Volatility smile shows individual Put and Call IV or combination

IV is calculated per strike AND option type basis(for example WTI 50 CALL its x and WTI 50 PUT its y). The question is when its shown in "Smile" its just shown on strike basis, so does that mean lower ...
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1answer
172 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 ...
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1answer
618 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 ...
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1answer
273 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?
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1answer
271 views

How to use reflection principle to solve the analytic solution of double barrier-out-call

We consider up/down-out-call whose payment $$V(T,S_T) = \Psi(S_T)\mathbb{II}(S_T),\ V(t,B) = 0.$$ Here the range constraint function is ...
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1answer
540 views

What are the differences between CFD and SSF?

What are the intricate differences between SSF and CFD? The similarities are that both take into account interest and settled daily thus looks more or less the same pima facie.
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1answer
107 views

Any good book recommendations for learning The Greeks?

I am interested in getting a good "feel" or intuition for the BSM Greeks. Specifically, i'm looking for a book which is light on the math (but not too light) and easy to read and understand. I am also ...
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1answer
79 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 ...
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1answer
160 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 ...
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1answer
380 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 $...
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1answer
102 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 ...
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1answer
188 views

eurodollar future

I just found out about eurdollar futures and I am confused. A eurodollar future contract is defined as a cash settled future based on a Eurodollar Time Deposit having a principal value of USD $1,000,...
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1answer
154 views

What are good risk management books or docs? [duplicate]

I have an unusual request/question. I was wondering if anyone here could recommend me some books about risk management and equity derivatives. I am about to do an internship as a risk analyst on an ...
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1answer
2k views

What is CVA (credit valuation adjustment)?

According to Wikipedia, CVA is defined as the difference between the risk-free portfolio value and the true portfolio value that takes into account the possibility of a counterparty’s default. What ...
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1answer
104 views

Cap option on Libor

We denote discount factor $D(t),$ zero coupon bond $B(t,T),$ $E_t[X] = E[X|\mathcal{F}(t)]$ and $T$-forward measure $E_t^{T}[\ ]....
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1answer
77 views

Is it possible to approach finding the risk premium of this derivative using Ito's Lemma?

I understand the author's intended solution to the below problem, but I thought I would see if I could solve this using first principles and Ito's Lemma instead for practice. Let $V(S(t), t) = e^{rt}\...
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2answers
510 views

Prove that the vertical spread condition is bounded

I need to prove that vertical spread is bounded, by using no arbitrage condition. 0 > (C(T,K1 )- C(T,K2))/(K1- K2 ) >-e^(-r*T ) I have documented my ...
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1answer
117 views

Beginner question about basis risk

new to the area, and had a question about basis risk. If I entered into a receive fixed pay 1mo Libor swap, why is it good for me if the 1x3 month Libor widens and bad for me when it tightens. Also ...
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139 views

Is a linear hedge sufficient for most purposes?

I was in a lecture of Bruno Dupire's when he said something along the lines of a linear hedge being sufficient for most purposes. He gave a counter example as well: a corporation producing something ...
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167 views

Analysis of exercising a call option early

Most options traders sell their call options early instead of exercising them, as you would make a bigger profit this way due to being able to salvage some remaining extrinsic value. For example: ...
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1answer
733 views

Why we consider second derivative w.rt price but only first derivative w.r.t time and volatility

What is the reason (better if it is intuitive, and not too math heavy), that when we talk of Greeks, we consider second derivative with respect to price (gamma), but only first derivative with respect ...
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1answer
252 views

Gamma derivation from the expectation

I am trying to derive Gamma from the expectation principle (differentiating under expectation sign). I understand these steps $\frac{d^2 C}{d x^2} = e^{-r\tau} \mathbb{E} [ \frac{\partial}{\partial x}...
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1answer
239 views

Jump-Diffusion Processes

This last quarter of college for senior project, I will be doing research on the application of jump-diffusion processes to pricing derivatives. I was wondering if anyone could recommend any resources ...
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1answer
64 views

Pricing with local volatility for derivatives beside options

Say I have calibrated an local volatility mode to market data on a forward on stock X. Say I want to price a derivative Y that is NOT a call/put option. What is the (or one of many) general strategy ...
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1answer
43 views

Equivalence of formulas for pricing the Delta of a European Call Option?

I came across two formulas to compute the Delta of European Call Options. The First: $\frac{\partial C}{\partial S} = e^{(b - r)T} N(d_{1})$ The Second: $\frac{\partial C}{\partial S} = e^{-qr}N(d_{...
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1answer
31 views

Term structure model for exchange-traded STIR futures and their options

As I understand, models such as the SABR extension of the Libor Market Model are the "standard" for interest rate derivative valuation in OTC markets, where options tend to be European and it is ...
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1answer
93 views

Longstaff Schwartz algorithm

I am new in finance, I have implemented the Longstaff Schwartz algorithm for pricing american otion - one asset (dimension = 1). My questions : Does this algorithm still efficient for a high ...
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1answer
56 views

Should one calculate CVA even when exposure is negative?

I have an example, where two companies have the bilateral nature of derivative contract. Companies have exchanged collateral a number of times, so at a certain point in time each sides holds some ...
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1answer
169 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 ...
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1answer
621 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 ...
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1answer
331 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: ...
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1answer
381 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 ...
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1answer
517 views

Differences between Snowball, KIKO and TRF derivatives?

Can you explain what are some similarities and differences between snowball, KIKO (knock in knock out) and TRF (target redemption forward) derivatives?
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1answer
619 views

Why does a futures price converge to a spot price?

I've sort of get the arbitrage logic of it, i.e if the futures price is more expensive than spot price, then investors would short the contract and buy the asset for delivery. Correct me if i'm wrong. ...
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1answer
115 views

What is the best trading simulation platform for futures, swaps, options, etc.?

I've just started studying derivatives from the "Options, futures, and other derivatives - J.C. Hull" and I'd like to see how to do hedging and trading transactions through a simulation platform or a ...
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433 views

Black Scholes biases

I have been doing some research regarding options pricing (particularly using B.S) and have come across two research papers which discuss how the Black Scholes model has a tendency to overprice and ...
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2answers
1k views

What is the “inflation delta” of an option?

I'm preparing a report on the different Greeks used in risk measurement, and my boss mentioned the inflation delta within the first-order Greeks (and the Inflation Vega, but I guess that if I figure ...
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1answer
604 views

Derivative: Delta of a Down and Out Call Option with Barrier=Debt(K)

I am trying to compute the derivative of this function with respect to V0: This is the price of a down and out call option, assuming the barrier equal to the level of debt K. In other terms, I need ...
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1answer
171 views

Relations between Call and Put

I am trying to solve a question in finance but I am pretty much stuck and would need your help :) Suppose you know the following information about a market: Future is at 66 70 strike straddle is ...
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2answers
105 views

How to price jumps in payoffs

I specifically want to know how to model a jump condition while valuing a derivative.Example :- the jumps which are observed in digital product payoffs, or barriers and knockouts. Although a ...
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1answer
278 views

Is an FX forward with delayed settlement still a derivative?

As an example: Trade date: 1/1/16 Maturity date: 2/29/16 Settlement (exchange of currencies) 3/31/16 Is the instrument between 2/29 and 3/31 still deemed a forward? The forward rate is determined so ...
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862 views

put call parity for futures options derivation in Hull

In Hull, the following derivation of PCP for futures options: What confuses me is that it is stated that the payoff of the long futures is $F_t-F_0$. The footnote states: the analysis assumes that a ...
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1answer
1k views

Conversion of SPY prices to ES prices

I have a system that I use intraday that works great on SPY. Due to the extra leverage available plus other benefits I am thinking about trading the system using ES. Is there a conversion factor ...
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1answer
695 views

Lease Accounting / FX Embedded Derivatives: How to Value Floor / Cap Optionality Features

Suppose you have a lease agreement where the functional/domestic currency is RUB and the currency on which the lease is written USD. Let $S$ be the USD/RUB exchange rate (# of rubles per 1 dollar). ...
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1answer
60 views

Desperate for help with simple derivative

Can someone help explain how differentiating the following with respect to $x$: $$ \frac{1}{2} \alpha \mathbf{x}^T \Sigma \mathbf{x} + (\mathbf{\mu} - R\mathbf{1})\mathbf{x} $$ Yields the following: ...
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535 views

Numerical delta of Bond Options

I'm trying to calculate the delta for bond Call options. I'm using the vasicek model which gives the following solution for a Zero-coupon bond call option: $Z = N P(t,S) \Phi(d_1) - K P(t,T) \Phi(d_2)...
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359 views

Optimal Upper and Lower Bounds

For the following exercise: Give optimal upper and lower bounds on the price today for a product that pays a function of the spot price, $S$, of a non-dividend paying stock one year from now, there ...