Questions tagged [derivatives]
A financial contract whose payoff is linked to the evolution of an underlying security.
303
questions
0
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0answers
31 views
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+\...
-1
votes
0answers
50 views
Exotic Traders: Trading Decision [on hold]
I am curious to understand the mind of an exotic trader. Suppose if you just sold an exotic option and want to hedge out some greeks risk of your exotic option, would you hedge your gamma or your vega ...
2
votes
0answers
43 views
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 ...
2
votes
1answer
61 views
Cap price as bond options
I am currently struggling with model calibration of the Hull-White (or Vasicek) model to Caps and Floors. My main problem is that I am confused about the notation.
In Brigo & Mercurio (2006, p. ...
2
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0answers
52 views
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?
4
votes
0answers
42 views
backtesting garch in R
I am trying to backtest my arch model using ugarchroll but I am getting this warning message
"Warning message: In .rollfdensity(spec = spec, data = data, n.ahead = n.ahead, forecast.length = forecast....
0
votes
1answer
31 views
Relation between ATM, RR and BF
In FX derivative market, why does vol spread of ATM > RR > BF? ATM is the most liquid and intuitively it should have the lowest spread. Please help me in understanding the rational behind the above ...
2
votes
0answers
49 views
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 ...
2
votes
0answers
58 views
Understanding the notion of future options
I am currently studying different types of option-related derivatives and I am quite confused about the notion of “futures options”.
My textbook says that
A futures option is the right, but not ...
4
votes
1answer
73 views
Option pricing: Relationship between Theta and early exercise
I am confused about the following:
For a European put option, the parameter $\Theta$ is given by
$$ \Theta= \frac{d V}{dt} = -\frac{SN'(d_1) \sigma}{2 \sqrt{T-t}} + rK e^{-r(T-t)}N(-d_2).$$
My ...
3
votes
0answers
45 views
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 ...
3
votes
3answers
251 views
Compute the price of a derivative
Consider the payoff function
\begin{align*}
f(x)=\begin{cases}
3 & \text{if }x\leq 30, \\
33-x & \text{if }30<x<35, \\
-2 & \text{if } x\geq35.
\end{cases}
\end{align*}
How would I ...
0
votes
1answer
85 views
Finding todays price of a derivative
Today's market prices for European call options $c(T;K)$ and put options $p(T;K)$ with maturity T and any strike K.
Let $B_t = e^{rt}$ be the price of the risk-free bond and St the price of the stock.
...
0
votes
1answer
74 views
What happens to both sides of an inflation swap agreement if there is deflation?
If there is deflation does the Inflation receiver not only pay the fixed leg but also receives a reduced CPI?
I.e. does he lose twice?
5
votes
1answer
135 views
When would open interest equal trading volume?
I know the difference between open interest and trading volume. Open interest is the number of contracts, long or short, outstanding. Trading volume is the number of contracts traded in a day.
...
1
vote
0answers
56 views
What is the name of these digital basket options?
Consider a basket of correlated assets $(S_1(t),\ldots, S_N(t))$, as well as a vector of strike prices $(K_1,\ldots,K_N)$, and let's look at the following European payoff types:
An option that pays 1€...
0
votes
2answers
80 views
Why would a buyer buy a Warrant vs an Option, both having the same economics
Assume you have a Warrant and an Option both with the same economics i.e strike, expiry, type etc.
Also assume that the Warrant has been issued by a high grade reputed issuer (i.e there is a almost a ...
0
votes
1answer
58 views
If short rates $r(t)$ do not determine the bond prices $P(t, T)$, then what is the basis for short rate models?
The question title says it all: We know that in general, specifying the short rate $r(t)$ does not specify the bond prices $P(t, T)$. So how can a model for short rates—for example the Vasicek model—...
1
vote
2answers
68 views
Valuation of Total return swaps (TRS)
I have seen a TRS being valued which has an index as underlying on the asset side. It also has a coupon rate associated with it. Asset leg is calculated by taking
...
3
votes
1answer
84 views
Difference between FRA and a zero coupon swap
Wanted to know the difference between an FRA and zero coupon swap with both legs having payment at maturity. If the zero coupon swap is forward starting, will it be equivalent to an FRA?
2
votes
0answers
33 views
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 ...
2
votes
0answers
57 views
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 ...
1
vote
1answer
76 views
Black Sholes option pricing with all but Delta [closed]
I'm trying to setup a little option pricing model in excel. I have all the information for the inputs (interest rate, IVs for different deltas, time to expiry, strike price, underlying price) but what ...
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0answers
39 views
Solutions for Paul Wilmott Derivatives Book
I am looking for solutions manual for Derivatives, "the theory and practice of financial engineering". I'm not sure if the manual is published ever but I couldn't get it.
I would be more than happy ...
2
votes
0answers
66 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-...
2
votes
0answers
63 views
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 ...
0
votes
1answer
50 views
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 ...
1
vote
1answer
77 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 ...
0
votes
1answer
37 views
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?
1
vote
1answer
44 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_{...
0
votes
1answer
50 views
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 ...
1
vote
1answer
108 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 ...
1
vote
0answers
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 ...
0
votes
0answers
39 views
Possible to have different collateral for each party?
Normally bilateral credit support annexes would have both parties post/receive the same collateral be it US treasuries or cash etc. Are there CSAs
Where each party has a different set of eligible ...
2
votes
2answers
119 views
What is the best book to learn about local vs. stochastic volatility, modelling and pricing of Exotics?
I am starting to delve into the world of Exotics and I am trying to find a rigorous yet understandable book that covers both mathematically and qualitatively (especially mathematically) the following ...
1
vote
0answers
55 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 ...
2
votes
1answer
80 views
what are the underlying transactions for SOFR?
Recently I am reading about SOFR (Secured Overnight Financing Rate), which is projected to replace LIBOR to be the reference for risk-free rate in the market.
But I still don't understand or imagine ...
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vote
0answers
111 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 ...
2
votes
1answer
89 views
relationship between notional amounts of volatility swaps and variance swaps
Taking volatility swap payoff as $$( \sigma_F - \sigma_S ) * volatility~notional $$
and Taking variance swap payoff as $$( \sigma_F^2 - \sigma_S^2 ) * variance~notional $$
I am trying to understand ...
0
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0answers
42 views
Equal weight correlation swap payoff derivation
I am aware that the payoff for a equal weighted correlation swap is;
$$
(\rho_K-\rho)*\text{Notional}
$$
where
$$
\rho = \frac{2} {n(n-1)}\sum_{i < j} \rho_{ij}
$$
I am wondering how I can derive ...
1
vote
0answers
51 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 ...
0
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0answers
17 views
Longstaff Schwartz with future conditional coupons
I've implemented the L-S algorithm for a simple put option. I want to value a more complex derivative which has future conditional coupons which only occur if the option is in the money. How would I ...
2
votes
1answer
164 views
Pricing under risk-neutral probabilities for weird derivatives?
I would really appreciate some help to value a weird derivative that I've found in an assignment:
$$ X=(S_{T_1}-k)^{+} = \max(S_{T_{1}}-k;0) $$
which expires at time $T_{2}$ and uses the price at ...
1
vote
1answer
33 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 ...
0
votes
0answers
37 views
Value of a put > strike?
I dont understand why the value of a put will be greater than the strike. Is this human error? Weatherford had been delisted and the price of the underlying OTC is 0.05 at the moment. Its a 0.50 Put 6/...
1
vote
1answer
115 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 ...
0
votes
1answer
152 views
Calculate forward discount factors and forward reference rate when discount factors are known
I am trying to learn how to value interest rate swap through portfolio of FRA's(forward rate agreement).But I have got stuck in calculation of floating leg.
Here is the scenario as given below for ...
1
vote
2answers
133 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 ...
1
vote
1answer
63 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 ...
2
votes
1answer
88 views
Derivatives Trading Jargon
Could you please help to understand trading jargon in this tweet.
Thanks in advance.
For non twitter users: Bookie pushing 5-delta (strike of 8) 2 month TRY puts. 0.6%
