Questions tagged [derivatives]

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

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3answers
323 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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4answers
363 views

Using a Constant as a Numeraire

Please provide steps to justify the below. 1) Can we use a constant as a numeraire? Related Question: Scaling Stock Price and Strike etc. by a Constant The rest of standard Geometric Brownian ...
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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.
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2answers
2k 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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2answers
259 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 ...
4
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1answer
409 views

Pricing the Passport option

Suppose underlying asset $S$ $$dS = \mu Sdt + \sigma Sd W$$ our portfolio $\pi$ consist with $q(t)$ stock $S$ and cash $\pi - qS$...
4
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1answer
198 views

Pricing an “equity protection” derivative: a practical example

This is the derivative security (its underlying index is the S&P 500): time to expiry $=4.8$Y; payoff calculation (0): on the expiry date, give a look at S&P 500 and let its price to be $S_{T}...
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3answers
209 views

Why do some principal-protected notes reset the gains to zero?

I was looking through the principal-protected notes issued by Lehman Brothers. One of them was the "100% Principal Protection Absolute Return Barrier Notes Linked to the S&P 500 Index". The ...
4
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1answer
775 views

Quantlib derivative valuation from zero curve

I have newly started with Quantlib-Python for valuing derivatives. In all the examples stated in this bolg or in other places, market quote is inserted and bootstrapping is done via individual rate ...
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2answers
2k views

Pricing Corridor Variance Spreads

Recently in the equity derivatives market there have been some trades on what are known as "Corridor Variance Spreads." The large equity derivative dealers and investment banks have been promoting it ...
4
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2answers
307 views

Greeks and Option Premium

If a linear sum of options is constructed such that the premium payout is zero, then does it mean that resultant greeks of the cumulated options positions will be nearly zero. For simplicity, lets ...
4
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1answer
149 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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1answer
136 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-...
4
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1answer
433 views

How did bans on short-selling affect the derivatives markets?

Due to the ongoing turmoil in the financial markets a short-selling ban is being considered (again, one has to say, but this time in Europe): http://www.nytimes.com/2011/08/12/business/global/europe-...
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1answer
115 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
196 views

Discounted asset price is martingale in BS model

I want to verify that the discounted stock price process $\mathrm{e}^{-r(T-t)}V(S_t,t)$ is a martingale in the BS-model. Using Ito's formula and the BS-PDE I get that $$ \mathrm{d}\mathrm{e}^{-r(T-t)}...
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1answer
983 views

Build a Synthetic Loan for Personal Finance

Suppose I am short of cash and want a loan for some mundane objective like travelling or buying a car. The interest rate for personal loan with my bank is too high. Is there any way in finance that ...
4
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1answer
222 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 ...
4
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1answer
183 views

Calculating portfolio weights of derivatives

A rather simple question. You have a portfolio of USD100 in cash. You now take USD10 and buy a derivative that gives you exposure of USD200 to something. What is the weighting of cash in the ...
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1answer
873 views

Obtaining logical lists of Bloomberg security codes in Excel

I am using Bloomberg's BDP and BDH functions in excel to retrieve data for a set of options. The problem is that (as underlying prices move and expiration dates come and go) option strikes are ...
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0answers
87 views

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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0answers
82 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 ...
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0answers
169 views

Risk factors for derivatives on dividends

I consider pricing and risk analysis of derivatives on dividends of the members of equity indices (such as Dow Jones EuroStoxx). There are options but I focus on futures. What are the main risk ...
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517 views

bank issuing structured products

"The investment banks supplying structured products were effectively buying options from investors" How to understand this quote from this source? I would think the investors are usually had (long) ...
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16k views

What is a Constant Maturity Swap (CMS) rate?

I have been searching in books and on the internet for a basic definition and explanation of CMS rates, but I cannot find anything clear and simple. Can you explain (maybe with an example) what a CMS ...
3
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1answer
329 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?
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2answers
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Delta Hedging with fixed Implied Volatility to get rid of vega?

I'm wondering if i should use a floating IV or a fixed IV to delta hedge my options every day. I've read this post but would like different information : Delta Hedging with fixed Implied Volatility ...
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1answer
721 views

Why buy/sell a forward starting option?

More precisely, in equity markets, why would one prefer to buy a forward starting option over a vanilla option ? What about the selling side ?
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1answer
103 views

Determining cost of carry for a future in Euronext.com [closed]

A snapshot from the trading book of the CAC 40 futures, on November 5 2018, is: Using the book prices, how can I compute the cost of carry implicit in the November and December contracts? Please ...
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1answer
302 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 ...
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1answer
2k views

What is the Difference Between a Credit Default Swap and a Bet

Reading the wikipedia page for derivatives on 00:02 E.S.T March 21 2016, a credit default swap (CDS) is summarized as being "A credit default swap (CDS) is a financial swap agreement that the seller ...
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1answer
606 views

the cash flows behind closing out futures positions

I always get confused about the cashflows occurring when a futures position is closed out. For example, say it is January and I enter into a long December Futures position with a futures price F(jan). ...
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1answer
398 views

Delta derivation from the expectation

I'm trying to understand the following transformation leading to Delta $\frac{dC}{dx} = e^{-r\tau} \mathbb{E}[ \frac{\partial}{\partial x}\text{max}(xY-K,0)] = e^{-r\tau} \mathbb{E}[Y \textbf{1}(xY&...
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2answers
354 views

Pricing forward contract on a stock

Please tell me where I've gone wrong (if I did in fact make a mistake). I'm pricing a long forward on a stock. The usual setup applies: This has payoff $S(T) - K$ at time $T$. We are at $t$ now. $S(...
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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?
3
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2answers
228 views

The PDE of caplet and floors

I know following PDE is the continuous payment case, but a caplet pays as rate: $\max(r - r^*,0),$ use the hedge portfolio $\Pi = V- \Delta Z$ $$d\Pi = dV- \...
3
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1answer
62 views

Fees on derivatives

Since it's obviously not at their fair value that derivatives are priced, how do investment banks compute the fees that they add on top of the risk neutral price ?
3
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1answer
406 views

Option Pricing under Jump Diffusion Models

I was wondering what the overall approach/intuition behind how to price options under Jump Diffusion Models. My understanding is under Diffusion models such as Geometric Brownian Motion (Black Sholes),...
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2answers
937 views

Market data for options

Looking for recommendations on places to get market data for options. I'm looking at NYSE and NASDAQ only. My current solution is my broker, Tradeking. I can request realtime data for 700 option ...
3
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1answer
74 views

Cox-Ingersoll-Ross: Monte Carlo Simulation

I am trying to build a Monte Carlo simulation in Excel (yes, far from optimal) for valuation of a callable bond. I have some experience with MC simulation on path dependent derivatives with stocks as ...
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2answers
77 views

Cash vs Deposit Rates

When constructing a yield curve for derivatives purposes, what is the difference between cash and deposits rates?
3
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1answer
1k 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 ...
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2answers
919 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 ...
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1answer
3k views

How to prove price of Asian option under geometric averaging is cheaper than a European call?

This was an exam question at Cambridge University. Let $S_t = S_0 \exp \left(\sigma W_t + (r-\dfrac{1}{2}\sigma^2) \right)$ and a bank account returns a continuously-compounded rate of interest $r$. ...
3
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1answer
204 views

Risk-neutral models for rights issues

A rights issue is the granting by a corporation to its shareholders of a right to purchase $N$ new shares for each $M$ shares they already hold at a (often discounted) price $K$. Thus, it ...
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3answers
429 views

Basic question about Black Scholes derivation

In the derivation of the Black Scholes equation, the value of the portfolio at time $t$ is given by $$P_t = -D_t + \frac{{\partial D_t}}{{\partial S_t}}S_t $$ where $P_t$ is the value of the ...
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2answers
703 views

How is volatility different from variance?

I always thought volatility was just variance ^ (1/2). Now I'm reading this book and it's saying that the two are different concepts. Excerpts include: Partly due to its use in Black-Scholes, ...
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1answer
294 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 ...
3
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1answer
267 views

Using Market Gamma to Predict FX Trading Environments

I want to test a hypothesis about using gamma to predict FX movements. Suppose that market makers will seek to be delta neutral given their portfolio of FX options. At any given time, market makers ...
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1answer
2k views

Bloomberg scripting language (BLAN)

Did anyone work with Bloomberg scripting language (BLAN is the name I guess). If so is it really flexible and is it competitive with other valuation services (say Super Derivatives). Does it enable ...

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