# Questions tagged [derivatives]

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

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299 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, ...
373 views

### What is the Benefit of holding a short option?

i am new to corporate finance and ask myself why a investor is interested in being short on a Option? The only he can win is a premium but he can loose much more. I understand with being a short I can ...
402 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 ...
2k views

### Curve Euribor - Euribor 3M

I'm setting up some Euribor 6M and Euribor 3M curves. So far i have all the data and quotes i need, but i'm having trouble defining the firsts points of the curve. I'm currently using 6M Euribor and ...
220 views

### Are there any derivatives which pay amount $a(p-b)^{2}-c$ where $p$ is the price of underling asset?

Are there any derivatives which pay amount $a(p-b)^{2}-c$ where $p$ is the price of underling asset ? (or in the case of options $max(0,a(p-b)^{2}-c)$) I'm not very strict here but I only want to know ...
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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### 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 ...
126 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 ...
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 ...
184 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 ...
251 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 ...
526 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). ...
844 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 ...
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### 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 ...
73 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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### 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 ...
168 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 ...
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### 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 ...
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 ...
481 views

Here is quanto adjustments in John Hull's book Options, Futures and Other Derivatives 9th ...
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### 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 ...
349 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 ...
160 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 ...
376 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 ...
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### 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 ...
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### 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 ...
154 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 ...
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 $C$ ...
123 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. ...
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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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### 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 ...
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### 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 ...
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### 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 ...
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### 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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### 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. $Index_t$ ...
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### 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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### 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 ...