Questions tagged [derivatives]

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

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169 views

Black 1976 caplet value

I've seen from two sources different formulas for the caplet value (Black 1976): $$Caplet_1 = N\cdot DiscountFactor_{0,k}\cdot yrFrcn_{k,k+1}\cdot [F_{k,k+1}\cdot N(d_1) - R_k\cdot N(d_2)]$$ $$ ...
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897 views

How to use USD OIS discounting for local currency uncollateralised swaps?

I am wanting to do MTM valuations of uncollateralised swaps as our banks have switched to using the USD OIS curve for their discounting (assuming no xVA adjustments). None of the cashflows we are ...
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273 views

How do I value uncollaterised swaps?

Do I need to discount using the OIS curve? Then add some sort of FVA adjustment over and above the CVA/DVA? How do I work out a banks cost of funding? Any help would be greatly appreciated. ...
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Is there a way of synthetically deleveraging a Real Estate portfolio?

If I manage a Real Estate portfolio with approximately 400 million in debt, which is roughly 50% Loan-to-Value (the properties are worth about 800 million). Is it possible to synthesize a bond ...
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How to synthesize this derivative security using plain vanilla call options?

A derivative security pays a cash amount c if the spot price of the underlying asset at maturity is between K1 and K2, where 0< K1 < K2 and expires worthless otherwise. Q: how to construct ...
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148 views

Derivatives (Forex Forward) [closed]

Good day, Please, consult me about Forex Forward Swap (Ex. pair USD/RUB). I am trying to calculate and cant understand, how it works. For example: I have: USD/RUB Fwd points 3M - 19650/19950 IR - 10....
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104 views

Does presence of arbitrage necessarily make all derivatives have zero value?

Spin-off from: Pricing when arbitrage is possible through Negative Probabilities or something else I mean in a theoretical sense: If we have a particular market model with some fancy assumptions such ...
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How can we unwind a Index ( SPX ) Variance swap?

Client A comes to dealer to trade variance notional $1m at T=0. The trade is executed with dealer short volatility with strike of 20. term Payoff of dealer = notional*( Stike^2 - realized vol^2 ) now ...
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52 views

Convexity of a rates Bermudan w.r.t strike

Recently there was a nice question asked on convexity of American put w.r.t strike: Convexity of an American put option Does the same hold for a Bermudan option in rates, where they underlyings are ...
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81 views

lead lag relationship among futures, options and stock prices

I have the data of past 10 years of NIFTY (the National Stock Exchange of India) stock, futures and options and I want to show the lead-lag relationship (which reacts first, futures, options or stocks)...
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68 views

Extensive list of financial derivatives and what method is used to value them

What I'm imagining is a long list of different types of financial instruments traded on the market along with the model(s) that is industry standard for valuing it. Something like: European equity ...
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Equal prices for call and put options with symmetric strikes around contemporaneous price?

Shouldn't (according to the Black-Scholes model) the price of a call option with a strike of an arbitrary amount away from the current asset's price, be equal to the price of a put option with the ...
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92 views

Calculate Third Order Greeks Options

Hope you're doing great! I'm struggling to develop the code for the Third Order Greeks. In all places I have searched, the development is missing. For example: But I don't know how to develop it, ...
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279 views

Python Quantlib : How to value the Non Deliverable currency Interest Rate Swaps?

I followed all the procedure in Quantlib to process interest rate swap valuation through Python Quantlib. I valued more than a million records. All the valuation is almost the expected amount. But '...
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Can someone explain to me the intuition behind the discount factor for this simple payoff? [closed]

Let's say you enter into a contract today in which in time t, you receive the difference between the underlying stock price and 100. Denote the stock price as S. Why is today's value of such a ...
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Where can I find the formulas to compute the Greeks for European Call and Put Options Assuming no annual dividend yield?

Every formula I come across involves a $q$ (the annual dividend yield). Where Can I find the formulas to compute the greeks assuming no dividends?
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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 ...
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570 views

how to derive the cost of carry formula

Can anyone explain why the cost of carry formula looks like this: $$F_0 = S_0 \cdot e^{(c-y)T}$$ ,where $S_0$ equals the spot price when $T=0$, i.e. today. $c$ denotes the cost of carry and $y$ the ...
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How is the performance measure computed here?

The image is from John C Hull Textbook titled Options, Futures and Other Derivatives ( page 407 - Ninth Edition). The table above was obtained after computing the delta of stock price, shares ...
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Why can a deterministic portfolio only grow at risk free rate

In black scholes derivation we assume that portfolio grows at risk free rate because the process is deterministic, my question is why is it riskfree rate? If i have information about some event in the ...
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165 views

Zero value of cash flow for future in Shreve's book

Here is the statements of future price in Shreve's book Stochastic Calculus for Finance II page 244 to proof the ...
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197 views

How do I modify my basic black scholes model in Excel to price american options?

I've modeled a basic black scholes model in Excel and I have been using it to price European options for backtesting purposes. This has been working fantastically and I would like to adjust this to ...
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CDS for Funding

I was wondering if anyone is familiar with how credit default swaps can be used for corp funding and financing. I came across an old case where a bank created a funding structure for a client (asset ...
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63 views

Value of American option after exercise

Suppose $V^+(S,t;K)$ is the value of a American option with strike $K$ before the exercise, and $V^-(S,t;K)$ is the value after exercise. Then how to understand the inequality $$V^+(S,t;K)\geq V^-(S,t;...
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Arbitrage problem [closed]

Question A share of non-dividend paying stock is trading at USD 30. The maturity of both options is 1 year from now. A put with a strike of USD 28 is trading at USD 1 and call with a strike of USD 29 ...
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How do option traders choose the strikes and maturities?

How do option traders choose their strikes and maturities ? Like why would one roll XX% puts in their protection leg instead of YY% puts, or why choose specifically XX%/YY% as the strikes in a ...
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160 views

How to produce historical prices of an option?

Let's say we have an option with underlying stock X and 2 years until maturity. We work out its volatility from X's historical prices across 3 trading years (756 days). To price the option, I can use ...
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Measuring Medium-term Inflation expectations and real interest rate from OIS and Inflation Swaps

In this speech by Mario Draghi, in section '2:Responding to high unemployment', and subsection 'Boosting aggregate demand', Mario states «Over the month of August financial markets have indicated that ...
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Why does Futures contract credit and debit a position daily, if it has “locked” the price?

I thought I had understood futures contract. But it seems the daily settlements betray my understanding. Futures contract provides price & product safety to involved two parties. E.g. Wheat ...
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Are there noticeable jumps in index options price due to systematic hedging of structured products close to big expiry dates?

I am looking at investigating factors that will cause jumps in index options prices close to big expiries in the name. I imagine systematic rebalancing of structured products will have a large impact ...
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29 views

Black model with negative strike price

Whats the issue if we try to price a swaption with a negative strike using Black model?
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38 views

How do I calculate FX forward hedge ratio?

Suppose I have a USD holding of 1,000,000 in my portfolio and I want to convert it into EUR in a month's time. I enter into a FX forward contract of the same amount USD 1,000,000, meaning that I have ...
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Issue with solving American call option questions

Here are the questions: I tried using DerivaGem, but I am not sure that I got the right result. Here are my attempts at solving the questions: a) Upper and lower bound: Is it correct? Not sure ...
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Contingent Claim Bounds

In my course on discrete-time finance we derived the following equality for a lower bound for the value of a not necessarily replicable contingent claim $D$. Here we are looking at a single period ...
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Is Vega hedging a complex derivative self financing?

Let's consider an incomplete market where I am pricing a complex derivative (Say a Bermudan). I hedge vega by a vanilla option(S). Let's say at t=1 I want to re-hedge. However, I have no guarantee ...
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61 views

Types of financial derivatives

I am looking for an explanation for different types/grades of derivatives. For example we have various asset classes: equities FX (currency) derivatives, etc. Or different types of secured debts, ...
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What to do if certain parameters are not market observable?

Lets say I have no clue on correlation between 2 equities in the market (i.e. i don't have an observable market price). What is the best way to go about marking this correlation for lets say the best ...
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Models for derivative portfolio composition

I focus on interest rate derivatives. I am looking for theoretical references which would model how financial institutions optimally choose among the different types of existing instruments (options, ...
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Bond CSA hedging risk

If I have a CSA that contains say GBP Gilts and GBP cash, how do i hedge the risk that the gilt funding cost goes up. Lets say my portfolio is > 10 years. Let's assume I have a discount curve that ...
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52 views

Is there a reason why futures and options have more substitutes than other financial instruments?

This is somewhat non-technical question, but it seems like this forum is still the best place for it. I'm reading Shleifer's Inefficient Markets, where he points out that [...] for futures and ...
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How does modeling provide an edge to banks in the derivatives space?

I was thinking about the actual need for creating quantitative financial models, especially for derivative products. Consider simple calls and puts for different strikes and expiries on stocks and ...
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Duration of forward starting swap

For a spot starting interest rate swap, the duration is calculated as the duration of the fixed rate leg less the duration of the floating leg. Each of these calculations is akin to calculating the ...
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Calculating the total return on an Interest Rate Swap (with 1 year of duration)

Say I am the fixed rate payer on an interest rate swap and have 1 year of duration of exposure. When I entered into the IRS (say yesterday), the quoted rate on Bloomberg was 15%. Say tomorrow the ...
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Derivatives - how to build the term structure of the cost of carry

1) By using the settlement prices, build the term structure of the cost of carry for the contract. Use the first two contracts to extract the implicit index that you will be using for all the ...
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Quantlib gives error message when Valution date is backdate

Valuation Date As Backdate(12 November 2019) On calcuating Vanilla Swap, Quantlib gives error message as below ...
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186 views

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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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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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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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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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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