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Questions tagged [derivatives]

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

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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?
2
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1answer
210 views

uncollateralised otc derivatives and bank funding costs

I've read multiple references that imply that the valuation of OTC derivatives being related to bank funding cost. Given that an uncollateralised OTC derivative needs no funding from the bank's ...
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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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3answers
177 views

Why don't we take the differential to the Delta in the Delta hedge-portfolio

For option $V(S,t)$ with underlying asset $S$, we have a hedge portfolio $$\Pi = V(S,t) - \Delta(S,t)S$$ I always confuse here, when we take the differential of $\Pi$ $$d\Pi = dV -\Delta dS$$ why ...
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2answers
178 views

European vs American derivative securities, interesting question

Let us denote by $c^A(t, S(t))$ the price, at time $t$ of a certain American-style derivative security, whose instrinsic value, at time $t$ is denoted by $V(t)$.From the no-arbitrage principle, we ...
2
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3answers
244 views

How are referenced asset gains routed in a credit derivative?

Lets assume for the sake of the example that we are talking about a Total Return Swap. The flow diagram is something like this. Lets assume the Payer in this instance is a Hedge Fund, and the ...
2
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1answer
495 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). ...
2
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2answers
823 views

Variable Drift Ornstein–Uhlenbeck Process

The Ornstein–Uhlenbeck process is defined as the stochastic process that solves the following SDE: $dx_t = \theta (\mu-x_t)\,dt + \sigma\, dW_t$ where $\theta>0$, $\mu$ and $\sigma>0$ are ...
2
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2answers
390 views

When can a derivative be considered to be path dependant?

The typical example of path dependant derivatives are knock-ins and knock-outs. At the same time vanilla American options can also be considered to be highly path dependant. Does a more or less ...
2
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1answer
95 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 ...
2
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1answer
166 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 ...
2
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1answer
90 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%
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1answer
276 views

How are Interest Rate Swaps Quoted

Im not sure if this is the right place to ask this question or whether Personal Finance & Money would be a better place. Basically I know that initially interest rate swaps are quoted based on the ...
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
453 views

quanto adjustments

Here is quanto adjustments in John Hull's book Options, Futures and Other Derivatives 9th ...
2
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1answer
114 views

Cap option on Libor

We denote discount factor $D(t),$ zero coupon bond $B(t,T),$ $E_t[X] = E[X|\mathcal{F}(t)]$ and $T$-forward measure $E_t^{T}[\ ]....
2
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1answer
53 views

Factors that make sell-side valuations of equity derivatives differ

If I ask a sell-side desk "A" for a "valuation" of a relatively simple OTC product (equity derivative, or 1st generation equity exotic), what are the reasons/main reason why a different sell-side desk ...
2
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1answer
2k views

How to understand the market price of risk

Consider the stochastic vol: $$dS = \mu Sdt + \sigma SdW_1$$ $$d\sigma = p(\sigma,S,t)dt + q(\sigma,S,t)dW_2$$ $$dW_1dW_2 = \rho dt$$ We want to obtain the price of option $V(\sigma,S,t),$ we use the ...
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2answers
2k views

why futures contract has no value

Can any one tell me, why futures contract has no value? We know that the value of future(Maybe I confuse the concept of ...
2
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1answer
384 views

Question in “Computational Methods in Finance” by Ali Hirsa - Chapter 2: Derivatives Pricing via Transform Techniques"

Reference: "Computational Methods in Finance" by Ali Hirsa - Chapter 2: Derivatives Pricing via Transform Techniques" - Page 37* Background: The author prices call option using the Fourier Transform. ...
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1answer
371 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),...
2
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1answer
366 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&...
2
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1answer
86 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 ...
2
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1answer
71 views

Which of the following derivatives are protected from arbitrary corporate action?

Practically speaking, are individual stock futures/options and Index futures/ (options on futures) protected from arbitrary company action? Say, in the extreme, all companies suddenly pays huge ...
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 ...
2
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2answers
665 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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1answer
265 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)=\...
2
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1answer
414 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 ...
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 ...
2
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1answer
158 views

When a particular bond is delivered, why there is the need to define a conversion factor? What is its utility?

Where, the conversion factor for a bond (by John C. Hull) is set equal to the quoted price the bond would have per dollar of principal on the first day of the delivery month on the assumption that the ...
2
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1answer
369 views

Interpretation of Open Interest for Options

Please define Option Open Interest, its interpretation, and why it matters? From my understanding, option open interest describes the net of long-short outstanding call or put options. But I do not ...
2
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2answers
197 views

Braess's paradox in quantitative finance: When optionality leads to lower value…?

One of the standard tenets of quantitative finance is that options should have an intrinsic value because optionality as such (in the sense of having more choices) should bring about value. This ...
2
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2answers
393 views

what is the actual point of vega on real option data

For a call option, we know that the vega is the derivative of the price wrt to the volatility. However the volatility, in that context, actually refers to the implied volatility of the specific call ...
2
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1answer
149 views

How do derivatives affect capital structures?

Yesterday, I was at a lecture where the speaker said that the impact of derivatives was often to make senior debt, in effect, subordinated debt (in terms of priority, recovery rates, etc.)? How do ...
2
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3answers
412 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 ...
2
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1answer
2k views

What exactly is the annualized forward premium?

A forward contract has a premium of $ 0$ because it is an obligation to buy or sell something in the future (hence there is more risk). Call and put options, on the other hand, have premiums of $C$ ...
2
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1answer
76 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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2answers
130 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 ...
2
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2answers
67 views

Arbitrage-free calculation of flat term structure out of normal term structure for e.g. pricing european options

since e.g. the Black-Scholes model requires a constant interest rate (flat term structure) but the real world often has normal term structure, I was wondering if it is mathematically correct to ...
2
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1answer
78 views

Variance Swap : dividends and rates

In a simplified world you can assume that the var swap is replicated by a continuous set of calls and puts and interest rates are equal to zero. So your PNL is only sensitive to the volatility. But in ...
2
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2answers
148 views

Why is option value different from discounted CF [closed]

as stated: why other assets' value can be determined by taking into consideration their expected cash flow (CF)? I read an argument which refers to arbitrage, but I wonder is there an additional ...
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 ...
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2answers
895 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. $Index_t$ ...
2
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1answer
232 views

Information on Weather Derivatives

I am looking for relevant information on the organization of the Weather Derivatives market. How is it organized? How information is shared? Where can we find historical database? I am aware of the ...
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2answers
169 views

remove seasonality in future contracts

very new to commodities. I have raw agriculture future data, and I need to remove the seasonality (de-seasonalize) from the data, what is the general approach ? Thanks for the help!
2
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1answer
160 views

How would you price this kind of derivative?

I am somewhat familiar with options but am wondering how to price calls/puts on this one: European exercise "Jumps" in underlying may occur Takes physical delivery upon exercise (is this even ...
2
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1answer
960 views

Question on OptionMetrics: “Strike Price times 1000” differs too much from Index price

I have a question regarding the strike price that is given on OptionMetrics. My goal is to primarily retrieve options prices of a specific maturity with strike prices that are 20% in-the-money, at-the-...
2
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1answer
658 views

How to automate the margin requirements for Eurex markets?

I'm looking at automating the calculation of margin requirements for a portfolio of Eurex markets. Eurex describe the margin calculations in this document. However, the only tool I can find is a ...
2
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0answers
50 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+\...
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0answers
51 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 ...