Questions tagged [exotics]
The exotics tag has no usage guidance.
118
questions
0
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1answer
62 views
Barrier Reverse Convertible
I am a finance student and during my free time I try to understand more financial products.
Today I have found a term sheet for a specific type of barrier reverse convertible but I couldn't understand ...
0
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0answers
64 views
Machine/Deep Learning for Exotic Option Pricing - Reference Request
Exotic options, in general, have very time-consuming valuation models. I believe in recent years there has been some research done on using supervised machine/deep learning to predict the valuation ...
0
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1answer
116 views
Black Scholes price of exotic claim
Given a time horizon N, I want to know the time-$t$ Black-Scholes fair price of $$\int_0^T S_u du$$ where $S_u$ denotes the time-$u$ stock price. I have used the formula I have been given as follows:
$...
1
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0answers
60 views
Option where option writer determines type of option to give to holder
I am currently looking at an exotic option that allows the holder, at some time $\tau$, to receive either a call or put — the choice of which is decided by the option writer — of which both have the ...
0
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0answers
33 views
using moment matching to price spread options (multi asset)
this is my very first question in this forum, after having been a greed follower since a few years, feeling that I need your help in a topic.
I need to price a multi asset option that has the ...
2
votes
1answer
192 views
Pricing an Option with payoff $\left(1-\frac{K}{S_t}\right)^{+}$
Let $S_t=S_0 \exp\left\{rt+0.5\sigma^2t+\sigma W_t\right\}$ be the usual GBM model for a Stock price under the money-market numeraire.
Suppose we want to price an option with payoff at maturity: $C_T=(...
2
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0answers
156 views
Valuation of Corridor Variance Swaps
Given that the payout of the Corridor Variance Swap (CVS) is $V \left(\frac{\sum_{n=0}^{N}I}{T_2 - T_0} (\sigma^2 - K^2) \right)$, where $\sigma^2$ is the realized variance within the pre-specified ...
0
votes
1answer
446 views
What's the difference between a normal Autocall and a Phoenix Autocall?
I understand the structure of the autocall, how they're priced and their contingent coupons. What I'm not completely clear on is the difference between a "vanilla" Autocall and a Phoenix ...
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46 views
Can the Heston model be used to price ANY option?
I've been reading through Heston's work and different Monte Carlo extensions of it and it seems very interestingly flexible. I've mainly used an application of it for pricing Memory Autocalls. Am I ...
0
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1answer
108 views
Undergraduate research topic in options [closed]
I'm an undergraduate student in finance with a pretty solid knowledge of financial mathematics and I'm currently picking a topic for my research paper this year. I have already decided I will pick ...
2
votes
1answer
111 views
Autocall pricing: what does “Lipschitz continuous parameterization” mean?
I've been reading through this research paper (A Monte Carlo Pricing Algorithm For Autocallables That Allows for Stable Differentiation by T. Alm, B. Harrach, D. Harrach, M. Keller) about a method for ...
1
vote
4answers
353 views
What book(s) would you recommend for structuring and pricing Exotic Products?
I've been looking for good books on structuring equity derivatives (Principal Protected Notes, Autocalls, Lookbacks, Reverse Convertibles etc). I only found ones that discuss mainly the theoretical ...
2
votes
0answers
43 views
Determination of critical stock price in compound option pricing
Under the Black-Scholes framework, there is a closed form formula for the price of a compound options, as first derived by Geske (1979). However, the analytical formula refers to a critical stock ...
6
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0answers
127 views
Autocallable option Delta
There have been numerous exotic trading desk blow ups lately, related to various reasons. However, in particular, one bank had some issues where they were pricing autocallable notes with Local ...
0
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0answers
105 views
COS method option pricing
is the cos method used to calculate prices of options other than the European call? Or is this method only used for calibration? Is it possible to evaluate the barrier and lookback options? I am ...
1
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0answers
55 views
Hedge robustness of the one factor Hull White model
I recently came across a quote in a book:
"All single factor models share the limitation that shifts in curve levels cause shifts in the package of vanilla options that are a good hedge for the ...
2
votes
1answer
62 views
Confusion about optimal choices with exotic options
With exotic options, holders usually face choices at certain times. In my understanding, the price of the option is determined by assuming the optimal choice is taken and computing the discounted ...
2
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0answers
48 views
Confusion about American style option
In American style exotic options, the holder is often faced with choices at certain times during the life span of the option. Following the/an optimal choice allows the user to maximize the value of ...
1
vote
2answers
102 views
Graph of a down-and-in barrier option
Here is a graph of Price vs Spot from Joshi's Quant Interviews book,
The first line is a down-and-out barrier option and the other one is a down-and-in barrier option. The strike is 100 and the ...
1
vote
0answers
60 views
How to price a down-and-out leveraged barrier call option using Brownian motion?
I am trying to price a type of leveraged down-and-out (LDAO) barrier call option, using geometric Brownian motion.
My python script is below. I am not sure how to correctly model the increasing ...
2
votes
1answer
98 views
What are the formulas to compute the greeks of a gap option?
I'm having a problem to calculate the gap option greeks since there are 2 different exercise prices K1 and K2. Do you know the answer or where can I read about these particular greeks?
2
votes
1answer
177 views
What kind of entities use exotic derivatives, and do they serve any purpose other than hedging risk?
I work in a sell-side bank in derivatives modeling. My work involves modeling and pricing of exotic derivatives and I often wonder who are the buyers of these products.
From my research, I found that ...
3
votes
0answers
56 views
Pricing/Hedging a yield curve spread option (YCS)
I have 2 perspectives as to what model to use for a YCS option:
It is an at the expiry option, so hit the marginals, correlate them with a copula, and be done with it.
To hedge the vega, I will need ...
2
votes
1answer
173 views
Bermudan option exercise probability when rates rise
I am looking for an explanation of what happens to the Bermudan exercise probability (i.e. does probability of early exercise go higher if rates rise or lower) w.r.t rates. This is of course with ...
2
votes
0answers
38 views
Local v/s global calibration for a Bermudan Option (calibrate co-terminals vs entire matrix)
I am quite new to rates modeling and I have a question on the pros and cons of calibrating to larger set of vanilla instruments v/s calibrating to an exotic's 'natural' hedges. For example, I could ...
0
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0answers
60 views
Barrier option with zero-strike
Good morning, everybody,
I would like to know whether an up-and-out call option with a zero strike has a special name in the list of exotic options or is still a special case of a barrier option..
...
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0answers
69 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, ...
3
votes
0answers
84 views
How to monetize ability to predict small stock movements smaller than spread?
For a relatively small subset of stock symbols I have been able to build a model that is able to 20-100 times per day consistently predict whether a stock is going up within the next 2 minutes, being ...
0
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0answers
47 views
Valuing Long-Term (5+ year) Cliquet Options
I'm trying to figure out how to value long term equity cliquet options with expirations 5+ years out. Even for SPX cliquets, vol surfaces are from what I can tell non-existent. Where would someone get ...
2
votes
0answers
67 views
Average Strike Option with bounds
I'm looking to price a call option with an exotic feature. The price I'm trying to calculate at time $t=0$ is
\begin{equation}
C = E^\mathbb{Q}[(S_T-K_T)^+]
\end{equation}
where $S_t$ is the stock ...
1
vote
2answers
99 views
Deltas on Barrier options vs Vanilla options
In "Heard on the Street" it states that
$$\Delta_{\text{up and out call}} \leq \Delta_{\text{standard call}} \leq \Delta_{\text{down and out call}}$$
Is there an intuitive explanation for why this ...
0
votes
3answers
197 views
Formula for the discounted payoff of a digital option
In "Heard on the Street" it states that the expected discounted payoff of a digital option is
$$H\exp^{-r(T-t)}N(d_2)$$
where $H$ is the payoff of the option, the exponential is the discounting.
...
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0answers
66 views
Proving an Expectation
Assume the risk-free bond $B_t$ and the stock $S_t$ follow the dynamics of the Black & Scholes model without dividends. Consider the perpetual American put option with payoff $(K-S_\tau)^+$ when ...
2
votes
1answer
231 views
Floating Strike Lookback Call Option
Assume the risk-free bond $B_t$ and the stock $S_t$ follow the dynamics of the Black & Scholes model
without dividends (with interest rate $r$, stock drift $\mu$ and volatility $\sigma$).
If $r=\...
1
vote
0answers
59 views
Exotic Derivatives Model Calibration
Suppose if we will like to price an exotic option with a model,we calibrate them to natural hedging instruments that are available in the market. Do we use all the instruments as hedge or only a ...
1
vote
0answers
101 views
Pricing exchange options
I am really puzzled about the mechanism of pricing of exchange options using a change in numeraire:
Suppose that $S^{(1)}$ and $S^{(2)}$ are stocks satisfying SDEs
$$dS^{(1)}_t = \mu_1 S^{(1)}_t \,...
2
votes
0answers
65 views
what is the state of the art method for hedging barrier options?
I want to create my own Barrier options for some security, I want to trade. I did some literature review, and found a static replication method, and many dynamic replication methods. I want to know ...
3
votes
0answers
77 views
What models are used for pricing cliquet options (esp. for Asian Equity underliers)? How good is Bergomi model?
What are the most common models, actually used by trading desks for Asian underliers, for pricing cliquet options?
I would like to know both - (1) the production model used for daily P&L, and ...
2
votes
0answers
149 views
Kingdom of Denmark Nikkei put warrants
I have read in a book from Emanuel Derman that Goldman Sachs manufactured a derivative in the early 90's that consisted of buying cheap puts on th Nikkei index (and paid in Yen), combined them which a ...
2
votes
0answers
46 views
Dimension reduction for worst of basket on $min(S_1, S_2)$
Suppose we want to price an exotic equity which is a function of $min(S_1, S_2)$. To do this, I'm trying to compute an implied volatility surface for $min(S_1, S_2)$ and then price the option using ...
2
votes
1answer
88 views
Hedging an option on a non-traded asset in BS world
I have given the following task given.
Suppose you are in a Black-Scholes World where you have the standard assets
$$ dS_t = \mu S_t dt + \sigma S_t dW_t $$
$$ dB_t = r B_t dt $$
and now you also ...
3
votes
2answers
2k views
How to price a phoenix and snowball type autocallable options?
I'm currently studying the pricing of autocallable options, especially snowball (accumalated coupon) and phoenix (accumlated coupon, but the coupon may also be autocalled if the underlying price ...
3
votes
1answer
316 views
Can we use Black-Scholes to price path dependent options?
I know that we can use the Black-Scholes framework to price vanilla products like a European call or put, where the payoff only depends on the share price at maturity.
But can we use it to price path ...
2
votes
0answers
114 views
Bates Model Jump Percentage Parameters
I am trying to calculate the jump parameters for the Bates volatility jumps, specifically, the mean of the jump percentages, $\mu_j$. For the value of $J$, I am using jumps $|\frac{s_{i}-s_{i-1}}{s_{i-...
3
votes
0answers
80 views
Rainbow option pricing formula under *Bachelier* model
Let's consider a call on min option on two underlying arithmetic Browniation motions $V_t$ and $H_t$ (no drift). Let $P_t$ denotes the price process of the option, $r$ the riskfree rate, $\tau$ the ...
5
votes
1answer
564 views
Exotic Trading Basic Questions - Banking
I just joined a support team for an equity exotic trading desk in a bank, I am looking for a high level overview of how exotic trading works in a bank.
For my questions let's take a common product: ...
1
vote
0answers
71 views
Swaption pricing and strategies
I am looking for resources (books, papers, websites, etc.) that deal with Vanilla and Exotic swaptions from a more advanced and quantitative perspective. I am interested in both the pricing side (e.g. ...
1
vote
1answer
57 views
In search of double barrier out option on a BM
We have a BM $X_t$ with $dX_t=\sigma dB_t$ ($X_0$ not necessarily zero!) under the risk neutral measure $\Bbb Q$. Given upper barrier $U$, lower barrier $L$, "strike" $K$ such that $L<X_0<U, L&...
2
votes
2answers
650 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 ...
5
votes
1answer
318 views
How frequently is local volatility calibrated to implied vol surface, in practice?
This has two related questions -
How frequently do equity derivative traders re-mark the implied volatility surface -
(i) once a day (e.g. at start of trading day, or end-of-day), or
(ii) ...
