Questions tagged [derivatives]

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

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2answers
206 views

Are power contracts traded on any stock market?

Are power contracts traded on any stock markets ? What about OTC markets ? I ask about the derivatives where payoff is some exponential function of difference between strike and spot price.
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272 views

List of financial derivatives Ito's Lemma does not apply

According to Ito's Lemma there is no restriction on the continuity of the stochastic process. The restrictions are on the continuity of the pay-off so that second derivatives with respect to ...
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398 views

Lattice Boltzmann method for pricing options

I'm looking into whether there is ANY information out there regarding the implementation of the Lattice Boltzmann method for pricing options (or other financial tasks). I am very new to the world of ...
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95 views

Can you hedge a derivative with a CASH|spot product or does it have to be another derivative instrument

Consider you have a SWAP (any kind) to hedge this SWAP, you will most likely use another Derivative,but can you use a cash|spot product to hedge this. Like Cash Equity or FX Spot
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396 views

equity linked notes (bull/bear equity performance bonds)

I have to price what my lecturer calls "Bull and Bear Equity Performance Bonds". Basically there's dates $t_i \in [0,T]$, where $t_i - t_{i-1}$ is the same for all choice of $i$. On each date the bull ...
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+50

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-...
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52 views

Why does it make sense to be long deep OTM calls on a stock if I expect the share price to jump in the near term?

This may be a simple question to all, however, it is puzzling me for the simple reason that deep OTM calls have very small deltas per the BSM. That is, even if the share price jumps (e.g. IBM moves ...
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53 views

How would one go about pricing a FX future?

What model/equations would I require to calculate the price for a foreign exchange future? This is in an attempt to mitigate foreign exchange risk. Also, how could one measure a business's exposure to ...
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109 views

A crash course in pricing

I need to refresh all the pricing theory. Is there anything like a crash course with practical and intuitive explanations? I will provide any further information. I am a mathematical engineer. I am ...
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50 views

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 ...
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1answer
62 views

Is it possible to create an instrument on the amount of beds sold within the real-estate market

I have been doing some research on the PBSA (purpose-built student accommodation) market around the globe. The market is growing year on year there is an index on this market the cbre. What ...
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76 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 ...
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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 ...
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46 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.
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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 ...
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404 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 ...
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124 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 ...
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62 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 ...
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60 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} = ...
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1answer
261 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}-...
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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 ...
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38 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 ...
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162 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 ...
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371 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 ...
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References on Pricing commodity forwards

Any good reference on pricing simple forward contracts with source code? Thanks
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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 ...
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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 ...
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143 views

Volatility Skew for Put and Call options [closed]

Given that the implied volatility follows volatility skew, which one has higher implied volatility? At-the-money put 40 (spot = strike = 40) or at-the-money call 160 (spot = strike = 160)? I am not ...
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Stock price is a martingale if the riskless interest rate is zero?

I came across a question as such: Suppose company IBC is trading at \$75 per share. What does it cost to construct a derivative security that pays exactly one dollar when IBC hits $100 for the ...
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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 ...
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627 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 ...
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242 views

How to make the arbitrage if intrinsic value is greater than European call value

It always says if the intrinsic value is greater than European call value, there will be a arbitrage opportunity,but how to construct the portfolio $(S_t - K)^+$ or how to make this arbitrage. By the ...
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203 views

Why is it enough to know the expected present value of cash flow in risk-neutral framework to price derivatives?

Wilmott book states that its enough to know the expected present value of all cash flow in risk-neutral framework to price derivatives. As I know, to obtain arbitrage-free market we need our ...
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IVF and implied distribution of underlying in John Hull's book

There is a statement in John Hull's book Options, Futures and Other Derivatives 9th page 633 for the relation between ...
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Why does increased stock borrow costs decrease a stock's forward price?

The author in this article -- http://streetwiseprofessor.com/?p=7294 -- states that an increase in stock borrowing costs decreases a stock's forward price: In the absence of manipulation, the ...
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360 views

Proof Black Scholes Theta

I saw the following proof of theta in a paper I read, and I thought it looked pretty neat. Unfortunately I don't understand the step that they do. This is what they do: Now, I don't get how they go ...
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129 views

Black 1976 caplet value

I've seen from two sources different formulas for the caplet value (Black 1976): $$Caplet_1 = N\cdot DiscountFactor_{0,k}\cdot yrFrcn_{k,k+1}\cdot [F_{k,k+1}\cdot N(d_1) - R_k\cdot N(d_2)]$$ $$ ...
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184 views

How do I value uncollaterised swaps?

Do I need to discount using the OIS curve? Then add some sort of FVA adjustment over and above the CVA/DVA? How do I work out a banks cost of funding? Any help would be greatly appreciated. ...
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Is there a way of synthetically deleveraging a Real Estate portfolio?

If I manage a Real Estate portfolio with approximately 400 million in debt, which is roughly 50% Loan-to-Value (the properties are worth about 800 million). Is it possible to synthesize a bond ...
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79 views

How to synthesize this derivative security using plain vanilla call options?

A derivative security pays a cash amount c if the spot price of the underlying asset at maturity is between K1 and K2, where 0< K1 < K2 and expires worthless otherwise. Q: how to construct ...
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130 views

Derivatives (Forex Forward) [closed]

Good day, Please, consult me about Forex Forward Swap (Ex. pair USD/RUB). I am trying to calculate and cant understand, how it works. For example: I have: USD/RUB Fwd points 3M - 19650/19950 IR - 10....
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99 views

Does presence of arbitrage necessarily make all derivatives have zero value?

Spin-off from: Pricing when arbitrage is possible through Negative Probabilities or something else I mean in a theoretical sense: If we have a particular market model with some fancy assumptions such ...
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Can someone explain to me the intuition behind the discount factor for this simple payoff? [closed]

Let's say you enter into a contract today in which in time t, you receive the difference between the underlying stock price and 100. Denote the stock price as S. Why is today's value of such a ...
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Where can I find the formulas to compute the Greeks for European Call and Put Options Assuming no annual dividend yield?

Every formula I come across involves a $q$ (the annual dividend yield). Where Can I find the formulas to compute the greeks assuming no dividends?
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Swap Pricing - Using forward rates vs using par bond after first floating payment

There seems to be two different methods I have come across for valuing a Interest Rate Swap - specifically the floating leg. One method described by Hull: incorporates the cashflow from the first ...
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247 views

how to derive the cost of carry formula

Can anyone explain why the cost of carry formula looks like this: $$F_0 = S_0 \cdot e^{(c-y)T}$$ ,where $S_0$ equals the spot price when $T=0$, i.e. today. $c$ denotes the cost of carry and $y$ the ...
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Why can derivatives be viewed as a portfolio of the underlying and the riskless asset?

I am struggling with the statement: "Every derivative of the underlying can be viewed as a portfolio of the underlying asset and the riskless asset." Is this based on the put-call parity? Also I ...
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How is the performance measure computed here?

The image is from John C Hull Textbook titled Options, Futures and Other Derivatives ( page 407 - Ninth Edition). The table above was obtained after computing the delta of stock price, shares ...
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Why can a deterministic portfolio only grow at risk free rate

In black scholes derivation we assume that portfolio grows at risk free rate because the process is deterministic, my question is why is it riskfree rate? If i have information about some event in the ...
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421 views

Is Red Code unique per derivative instrument

Does RED Code (="Markit Reference Entity Database Code") uniquely identify the derivative that has been traded? Is it possible to get a derivative's ISIN code from RED Code?