Questions tagged [derivatives]
A financial contract whose payoff is linked to the evolution of an underlying security.
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questions
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36 views
Duration of forward starting swap
For a spot starting interest rate swap, the duration is calculated as the duration of the fixed rate leg less the duration of the floating leg. Each of these calculations is akin to calculating the ...
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1answer
84 views
Going from $\mathcal{P}$ to $\mathcal{Q}$
Under $\mathcal{P}$, we have the Heston Model given by:
$$
d S_{t}=\mu S_{t} d t+\sqrt{\nu_{t}} S_{t} d W_{t}^{S},\\
d \nu_{t}=\kappa\left(\theta-\nu_{t}\right) d t+\xi \sqrt{\nu_{t}} d W_{t}^{\nu}.
$...
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0answers
30 views
Retrieve market data for OTC derivatives! [closed]
What are the required characteristics of an OTC-derivatives (ex. Fx forward) to identify the market data using Thomson Reuters or similar data vendor?
Thank you
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0answers
32 views
Calculating the total return on an Interest Rate Swap (with 1 year of duration)
Say I am the fixed rate payer on an interest rate swap and have 1 year of duration of exposure.
When I entered into the IRS (say yesterday), the quoted rate on Bloomberg was 15%.
Say tomorrow the ...
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2answers
64 views
Option on a dice game with three dices and min. value
We have a call option on 3 dices with strike 3. What's the fair value of the call when it pays the min value of the 3 dices?
E.g if we throw and have 426, the min is 2 here and so call is OTM (S < ...
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2answers
148 views
Hull-White Calibration /Hypothetical Cap Pricing
I have a question regarding calibrating Hull-White (Extended Vasicek) Model to bond data. As you know, and stated in Mercurio (2005), zero coupon bond price in the Hull and White (1994);
$P(t,T)=A(t,...
1
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1answer
72 views
Arbitrage when discounting and forward computation is done with different curves
I notice that (equity derivatives) trades generally are priced with different forward curve and discounting curve, which clearly lead to arbitrage. Is this arbitrage value too small to be ignored? How ...
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1answer
95 views
Intuition for consistent Derivative Prices under different Numeraires and Measures
This is essentially the Fundamental Theorem, however I am not asking for a thorough proof, I am more interested in the general intuition.
In words, it makes sense that whatever your unit of account (...
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0answers
58 views
Calculate upper bound for put option prices?
I need to know historical option prices for backtesting. The problem is I don't have such historical data.
Is there a way to calculate the upper bound for out of money (American) put option selling ...
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1answer
40 views
What is the difference between exercise and expiry date?
I know in American options you can exercise the options at any time before expiry date but in European options you can only exercise the options on expiry day.
On National Stock Exchange of India the ...
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1answer
123 views
How do market makers chose the size that they quote?
A typical quote in the derivatives market may be 2.00 bid at 2.50 ask with a size of say 100x100. How do practitioners go about choosing the size of the market (how many contracts) to quote? It seems ...
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34 views
Derivatives - how to build the term structure of the cost of carry
1) By using the settlement prices, build the term structure of the cost of carry for the contract. Use the first two contracts to extract the implicit index that you will be using for all the ...
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1answer
51 views
partial derivatives of multivariable function
Looking to verify whether the following formulation is correct. Suppose we have the following function, relationships:
$$y=f(x)$$
$$x=g(a,b)$$
$$y=f[g(a,b)]$$
Is the below correct (including ...
2
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1answer
76 views
i have an option derivative question
please show that the call and the put share the same vega, i.e., please prove the following equality.
do we derive the call and put equations ?
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0answers
48 views
Algorithmic trading strategies for financial derivatives
are there any strategies or considerations specifically designed for the algorithmic trading of financial derivatives, or textbooks that focus on this topic rather than underlying equities and ...
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0answers
22 views
Quantlib gives error message when Valution date is backdate
Valuation Date As Backdate(12 November 2019)
On calcuating Vanilla Swap, Quantlib gives error message as below
...
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1answer
49 views
Call price in case of AOA
I have this exercice, and for the last question, i tried to say that with lower bound, $C > S_0 - Ke^{-rT}$ which is $-8$ something but it doesn't make sense so i don't know what to do. Could we ...
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3answers
184 views
Is EONIA swap rate really credit risk free?
I have a question linked to the EURIBOR – EONIA spread (or OIS LIBOR spread).
I understand that the EURIBOR - EONIA spread is a credit risk indicator of the interbank market.
There is something I ...
3
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0answers
142 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+\...
2
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0answers
67 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
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1answer
143 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
63 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?
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1answer
72 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 ...
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0answers
71 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 ...
3
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0answers
69 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
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1answer
96 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
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0answers
52 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 ...
4
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3answers
307 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
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1answer
92 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
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1answer
128 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
175 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.
...
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0answers
57 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€...
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2answers
86 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
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1answer
65 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—...
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2answers
250 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
...
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1answer
222 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
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0answers
37 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
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0answers
61 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 ...
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1answer
80 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
52 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
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0answers
75 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
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0answers
78 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 ...
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1answer
60 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 ...
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1answer
107 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
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1answer
40 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?
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1answer
50 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
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1answer
62 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
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1answer
113 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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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 ...
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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 ...
