Questions tagged [derivatives]

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

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3
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1answer
284 views

FX options pricing exchange rate regimes

how can we estimate the impact of a exchange rate regime switch ( from fixed to float) on the options prices i'm talking about the moroccan case (EUR/MAD USD/MAD) options OTC , is there any stochastic ...
2
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2answers
670 views

Collateralized / uncollateralized swap

Is a fully collateralized interest rate swap considered free of counterparty credit risk? Or close to risk free? Therefore discounted by the rate that best proxies the risk-free rate (which is the OIS-...
2
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2answers
2k views

Different ways to express a 2s10s steepener?

Some off the top of my head 2s10s cash steepener, however this ages into a 1s9s over time 2s10s swap steepener, better/cleaner way? Are there other ways to express this curve strategy? Would you do ...
2
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1answer
91 views

Optimal number of nodes for binomial lattice?

Let's suppose one is valuing a Euro call on a ZCB in a Black-Derman-Toy lattice. How many nodes/levels of discretization are optimal? Obviously too many creates computational issues and too few ...
1
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1answer
215 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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0answers
293 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, ...
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0answers
128 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 ...
9
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3answers
396 views

Why does the price of a derivative not depend on the derivative with which you hedge volatility risk?

I'm trying to derive the valuation equation under a general stochastic volatility model. What one can read in the literature is the following reasoning: One considers a replicating self-financing ...
3
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1answer
839 views

Local Volatility implementation

The Dupire equation is well-known and mentioned in thousands of articles. Although I could not find a lot of documentation about a consistent and proper way of implementing the formula (The difficulty ...
4
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0answers
80 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 ...
3
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2answers
571 views

Contingent claim and Derivative

What's the difference between a derivative and a contingent claim? What is an example of a derivative which isn't a contingent claim? Since options or swaps are examples of derivatives that are ...
4
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2answers
1k views

Cash-settled swaptions

I was wondering, what is the motivation behind the payoff of the cash swaptions being multiplied by the swap annuity? $$c(S_{\theta, T})=\sum_{i=\theta+1}^{T}\tau_i\frac{1}{{(1+S_{\theta,T}(\theta))}^...
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0answers
589 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 ...
1
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1answer
180 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 ...
-1
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2answers
43 views

What would be the issue price of the following contract?

Stock currently A has a price equal to 100. Stock B also currently has a price of 100. The contract has a maturity $\mu$ of one year. At maturity the payout is the max price of either A or B. What is ...
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1answer
138 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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1answer
731 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 ...
4
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2answers
206 views

To what degree does computational complexity affect the pricing of options?

I have been tasked with writing a 25 page paper on computational complexity. The first 10 pages of this should be background an introduction to the field (which I have largely done already) and the ...
8
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1answer
721 views

Theoretical limits for contango and backwardation

What do you think would be the theoretical limit for contango? What about backwardation? This was asked in an interview. I am still not so sure about the answer.
0
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1answer
197 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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1answer
413 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
706 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 ...
4
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1answer
126 views

Books/papers on Insurance Derivatives?

I am looking to learn more about insurance-linked securities. I work for an insurance company and am interested in catastrophe risks and cat bonds. I have a good statistical background and master-...
1
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1answer
414 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 $...
2
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2answers
3k views

What is the difference between funded and unfunded derivative?

What is the difference between funded and unfunded derivative? Can anyone explain the difference between these two?
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1answer
104 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 ...
2
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2answers
316 views

Pricing 0% interest rate Floor Black Model

I'm having some trouble pricing a 0% interest rate Floor following Black's formula. The term d1 contains the expresion Ln(Forward/Strike) if the strike is exactly 0 this expresion yields an ...
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1answer
380 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: ...
4
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1answer
204 views

How to price up-out-call by solving heat equation like down-out-call

We know that by changing the variables we can obtain the Black-Scholes formula of vanilla call through solving the ...
2
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2answers
378 views

The dice game and derivatives trading

I happened to a interview question: Give a equal dice, you will gain the money which is the number you roll, then how much will you pay for the game. Naturely, the answer is 3.5. But the interview ...
2
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1answer
266 views

Binary option analytical formula

Given $r=0$, $\sigma(K)=\text{const}$ and: $$ \text{Binary} = \lim_{ε → 0} \frac{(C(K,\sigma (K))-C(K+ε,\sigma(K+ε)))}{ε} $$ I have to find the analytical expression for the above. Since $σ(K)=\...
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1answer
300 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?
2
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1answer
416 views

at-the-money short term straddle and the implied vol

Here is a passage from "Advanced Equity Derivatives: Volatility and Correlation" by Sebastien Bossu, Wiley (2014). We see the prox $\beta_0,$ it seems to use the approximation that ...
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1answer
191 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,...
2
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2answers
897 views

Pricing Cancelable swap

Consider a first hypothetical, a swap. Party 1 is paying 6 month Libor, semi-annually. Party 2. pays $1+3*(\frac{Index_\color{red}{T}}{Index_0}-1) $ only at maturity. Say the notional is 1. $Index_t$ ...
8
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2answers
297 views

Refer some most recent books of derivatives pricing by C++

Could you refer some most recent books of derivatives pricing by C++ including Tree method, Finite difference method, Monte Carlo etc. Once I read a series of <...
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0answers
150 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 ...
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1answer
516 views

Log-moneyness definition [closed]

Define the time-0 log-moneyness of a call on stock $S$ with strike $K$ and expiry $T$ to be: $$\log(S(0)\exp(rT)/K)$$ What does it mean for the strikes K to be at-the-log-moneyness?? I guessed this ...
0
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1answer
124 views

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 ...
-1
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1answer
78 views

Cash as Collateral in OTC Market

In OTC market Collateral Posting as cash is normal, so when it is said Collateral Posted as USD CASH Does that mean Actual amount of currency is posted electronically (or any security is posted) ...
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2answers
259 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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1answer
156 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 ...
3
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1answer
209 views

Replicating a square derivative with calls and puts

I have a derivative that pays off $S_T^2$ at time $T > 0$ with $S_T$ denoting the price of a non dividend-paying stock at $T$. I came across a question about how one can statically replicate this ...
2
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1answer
454 views

quanto adjustments

Here is quanto adjustments in John Hull's book Options, Futures and Other Derivatives 9th ...
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1answer
142 views

Zero value of cash flow for future in Shreve's book

Here is the statements of future price in Shreve's book Stochastic Calculus for Finance II page 244 to proof the ...
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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 ...
4
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1answer
1k views

How to measure contango?

Is there any unit of measure for the magnitude of the contango (or backwardation) for futures, so you can compare the contango of many symbols.
2
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1answer
124 views

How to understand closing position of futures

When we want to close out the position of futures prior to the delivery period, you will entering into the opposite trade to the original one. Equivalently, except ...
2
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1answer
201 views

Physical Measure in Weather Derivatives — Hull

In Hull's 8ed., he states in Chapter 33, Energy and Commodity Derivatives, The second part of the chapter considers weather and insurance derivatives. A distinctive feature of these derivatives ...
3
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1answer
2k views

What exactly is a deposit futures contract?

I have been working with Deposit Futures and the Brazilian One-Day Interbank Deposit Future but I can't get my head around them. What exactly is delivered and when? What is the contract a right to?