# Questions tagged [derivatives]

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

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359 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 ...
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### 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 ...
379 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 ...
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### 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. ...
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### 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?
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### 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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### 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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### 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 ...
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### 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—...
3k 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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### 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?
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### 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 ...
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### 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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### 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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### 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 ...
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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 ...
178 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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### 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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### 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 ...
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### 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 ...
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### 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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### 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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### 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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### 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 ...
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### 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 ...
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### 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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### 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 ...
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### 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 ...
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### 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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### 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/...
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### 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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### 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 ...
358 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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### 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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### Detect trend of an index

My question is about determining the trend and it can break down to 3 parts. To clarify, a trend in my point of view, and in simple form, is the last close at time t relative to its time reference, i....
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### What is the purest way to get exposure to Jump risk premia, is there a jump swap

So to get exposure to Variance risk premia one could use variance swaps, is there a equivalent security for jumps. Hedging against jump but not diffusion risk could allow one to take targeted exposure ...
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### Two barrier options puzzle

I come across an interesting question about barrier option as shown below. Two barrier options are given with the same parameters including the barrier level. The first one is knocked out when it ...
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### 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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### How to Compute the payoff of Var Swaps, which I have replicated

I used Derman(1999) method, to calculate the fixed Kvar for Variance Swaps using actual option price data. The first Pic Shows the outcome. (ignore the 0s). Now the profit and loss of short var swaps ...
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### Derivation of VIX Formula

I've read a lot of derivations about VIX formula. I can say it is -adjusted- fair strike of variance swap. But I can't see how it goes from variance swap rate to VIX formula. In particular I can't see ...
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### Cash vs Deposit Rates

When constructing a yield curve for derivatives purposes, what is the difference between cash and deposits rates?