Questions tagged [derivatives]

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

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94 views

Pricing with local volatility for derivatives beside options

Say I have calibrated an local volatility mode to market data on a forward on stock X. Say I want to price a derivative Y that is NOT a call/put option. What is the (or one of many) general strategy ...
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48 views

Equivalence of formulas for pricing the Delta of a European Call Option?

I came across two formulas to compute the Delta of European Call Options. The First: $\frac{\partial C}{\partial S} = e^{(b - r)T} N(d_{1})$ The Second: $\frac{\partial C}{\partial S} = e^{-qr}N(d_{...
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37 views

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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182 views

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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83 views

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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211 views

Upper bound option price in volatility dimension

All, I have a theoretical question about the value of an option when spot price goes to infinity as a function of volatility going to infinity. I know that for a call option: The option value ...
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1answer
787 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 ...
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634 views

Differences between Snowball, KIKO and TRF derivatives?

Can you explain what are some similarities and differences between snowball, KIKO (knock in knock out) and TRF (target redemption forward) derivatives?
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677 views

Why does a futures price converge to a spot price?

I've sort of get the arbitrage logic of it, i.e if the futures price is more expensive than spot price, then investors would short the contract and buy the asset for delivery. Correct me if i'm wrong. ...
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126 views

What is the best trading simulation platform for futures, swaps, options, etc.?

I've just started studying derivatives from the "Options, futures, and other derivatives - J.C. Hull" and I'd like to see how to do hedging and trading transactions through a simulation platform or a ...
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478 views

Black Scholes biases

I have been doing some research regarding options pricing (particularly using B.S) and have come across two research papers which discuss how the Black Scholes model has a tendency to overprice and ...
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1k views

What is the “inflation delta” of an option?

I'm preparing a report on the different Greeks used in risk measurement, and my boss mentioned the inflation delta within the first-order Greeks (and the Inflation Vega, but I guess that if I figure ...
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1answer
172 views

Relations between Call and Put

I am trying to solve a question in finance but I am pretty much stuck and would need your help :) Suppose you know the following information about a market: Future is at 66 70 strike straddle is ...
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105 views

How to price jumps in payoffs

I specifically want to know how to model a jump condition while valuing a derivative.Example :- the jumps which are observed in digital product payoffs, or barriers and knockouts. Although a ...
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307 views

Is an FX forward with delayed settlement still a derivative?

As an example: Trade date: 1/1/16 Maturity date: 2/29/16 Settlement (exchange of currencies) 3/31/16 Is the instrument between 2/29 and 3/31 still deemed a forward? The forward rate is determined so ...
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992 views

put call parity for futures options derivation in Hull

In Hull, the following derivation of PCP for futures options: What confuses me is that it is stated that the payoff of the long futures is $F_t-F_0$. The footnote states: the analysis assumes that a ...
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1k views

Conversion of SPY prices to ES prices

I have a system that I use intraday that works great on SPY. Due to the extra leverage available plus other benefits I am thinking about trading the system using ES. Is there a conversion factor ...
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719 views

Lease Accounting / FX Embedded Derivatives: How to Value Floor / Cap Optionality Features

Suppose you have a lease agreement where the functional/domestic currency is RUB and the currency on which the lease is written USD. Let $S$ be the USD/RUB exchange rate (# of rubles per 1 dollar). ...
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61 views

Desperate for help with simple derivative

Can someone help explain how differentiating the following with respect to $x$: $$ \frac{1}{2} \alpha \mathbf{x}^T \Sigma \mathbf{x} + (\mathbf{\mu} - R\mathbf{1})\mathbf{x} $$ Yields the following: ...
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586 views

Numerical delta of Bond Options

I'm trying to calculate the delta for bond Call options. I'm using the vasicek model which gives the following solution for a Zero-coupon bond call option: $Z = N P(t,S) \Phi(d_1) - K P(t,T) \Phi(d_2)...
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371 views

Optimal Upper and Lower Bounds

For the following exercise: Give optimal upper and lower bounds on the price today for a product that pays a function of the spot price, $S$, of a non-dividend paying stock one year from now, there ...
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206 views

Are power contracts traded on any stock market?

Are power contracts traded on any stock markets ? What about OTC markets ? I ask about the derivatives where payoff is some exponential function of difference between strike and spot price.
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275 views

List of financial derivatives Ito's Lemma does not apply

According to Ito's Lemma there is no restriction on the continuity of the stochastic process. The restrictions are on the continuity of the pay-off so that second derivatives with respect to ...
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410 views

Lattice Boltzmann method for pricing options

I'm looking into whether there is ANY information out there regarding the implementation of the Lattice Boltzmann method for pricing options (or other financial tasks). I am very new to the world of ...
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95 views

Can you hedge a derivative with a CASH|spot product or does it have to be another derivative instrument

Consider you have a SWAP (any kind) to hedge this SWAP, you will most likely use another Derivative,but can you use a cash|spot product to hedge this. Like Cash Equity or FX Spot
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400 views

equity linked notes (bull/bear equity performance bonds)

I have to price what my lecturer calls "Bull and Bear Equity Performance Bonds". Basically there's dates $t_i \in [0,T]$, where $t_i - t_{i-1}$ is the same for all choice of $i$. On each date the bull ...
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55 views

Calculate upper bound for put option prices?

I need to know historical option prices for backtesting. The problem is I don't have such historical data. Is there a way to calculate the upper bound for out of money (American) put option selling ...
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111 views

How do market makers chose the size that they quote?

A typical quote in the derivatives market may be 2.00 bid at 2.50 ask with a size of say 100x100. How do practitioners go about choosing the size of the market (how many contracts) to quote? It seems ...
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46 views

Algorithmic trading strategies for financial derivatives

are there any strategies or considerations specifically designed for the algorithmic trading of financial derivatives, or textbooks that focus on this topic rather than underlying equities and ...
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56 views

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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52 views

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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60 views

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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113 views

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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55 views

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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63 views

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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83 views

Derivative of the stock price and volume at time t

According to Forecasting of Jump Arrivals in Stock Prices: New Attention-based Network Architecture using Limit Order Book Data at page 9, I would be interested in deriving the the price (ask and bid ...
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80 views

pricing of futures

When pricing futures with the cost of carry model; When do you use continuous compounding and when do you just use simple compounding? AND WHY? Also, when deriving proof of no arbitrage with the cost ...
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67 views

FX Average Forward Pricing

Lookin for documentation on how to price FX Arithmetic Average Rate Forwards. Couldn't find any info on textbooks. Any help is very appreciated.
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113 views

Monte Carlo VAR with differente asset classes

I have found a very useful post regarding the use of Monte Carlo simulaton to obtain portfolio Value at risk, based on Cholesky decomposition, random variates, etc. This post I'm talking about is: Is ...
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130 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 ...
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62 views

The interpretation of discounted Greeks

I understand that Delta measures the rate of change of the theoretical option value with respect to the change of the underlying asset price. This also represents the number of shares a call option ...
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60 views

Solving for roots of a stochastic pay-off function

I have a pay-off function for a derivative which is defined by the Heaviside difference between $G$ and $B$ shifted by $-F$. To find the value of $V_{t=0}$, I need to find $\tau$ when $\frac{dV}{dt} = ...
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57 views

Boundary condition of lookback option

This is a well know conclusion of the boundary condition of lookback option. Here $$\dfrac{d S_t}{S_t} = (\mu - D)dt + \sigma ...
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44 views

Floor option EVE risk: Sum of key rate shocks risks vs. the rates parallel shock risk

Consider a model measuring the EVE risk (change in the economic value by shocking the rates; PV01) of a portfolio of vanilla interest rate floor options. Is there any reason for the EVE risk of a ...
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174 views

Valuing cleared cancellable swap

I have a cancellable swap to value, with the float leg payer being a clearing house. The cancellable term sheet states the interest rate swap has a Bermudan style optionality for early termination ...
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482 views

Funding Valuation Adjustment (FVA) - understanding issues

Having trouble with understanding the logic of FVA. Let's assume that as a trader I trade with a client an uncollateralised fx forward. Then, I hedge my position with "risk-free" bank with which I ...
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References on Pricing commodity forwards

Any good reference on pricing simple forward contracts with source code? Thanks
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89 views

Scaling Stock Price and Strike etc. by a Constant

Please provide steps to justify the below. 1) If the stock prices, strike and other price related parameters are scaled by the same constant, will the derivative price scale accordingly? I would ...
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78 views

Fair Price CDS Spread for a Bank

I have been using CreditGrades to calculate fair one year CDS spreads for firms. However, the authors of the model explicitly say that the model does not hold for banks or financial firms. If I need ...
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Volatility Skew for Put and Call options [closed]

Given that the implied volatility follows volatility skew, which one has higher implied volatility? At-the-money put 40 (spot = strike = 40) or at-the-money call 160 (spot = strike = 160)? I am not ...