Questions tagged [exotics]
The exotics tag has no usage guidance.
149
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Delta-Hedging Exotic Options
I have already figured out that Delta-hedging essentially turns European options into volatility products where you pay implied vol and get paid realized vol for long positions and you pay realized ...
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What are the most common/popular exotics in the interest rate markets these days?
By "exotic" I mean anything that is not a plain vanilla swap, swaption, cap or floor. Also any IR hybrids if appropriate.
Possible examples would be:
CMS and CMS spread options
Multi-callable swaps
...
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For pricing, what types of Exotic Options are suitable using Local Volatility Model or a Stochastic Volatility Model?
I understand that stochastic volatility models should be used when the exotic option payoff is volatility dependent (such as variance swaps and volatility swaps).
Stochastic volailtiy models should ...
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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 ...
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Derivation of the formulas for the values of European asset-or-nothing and cash-or-nothing options
The asset-or-nothing European option pays at t = T the value of the stock when
at time T that value exceeds or is equal to the exercise price E, and nothing if
the value of the stock is below E. So, ...
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Pricing callable range accruals on spreads
What is an efficient method of pricing callable range accruals on rate spreads? As an example:
A cancellable 30 year swap which pays 6M Libor every 6M multiplied by the number of days the spread of ...
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2
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Multithreading Monte-Carlo pricing in QuantLib for a single product
I've been actively using QuantLib for structured product pricing using Monte Carlo. Due to the fact that at a great deal of paths are often needed and one needs to speed up the calculation and all ...
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How to simulate a jump-diffusion process?
I would like to price Asian and Digital options under Merton's jump-diffusion model. To that end, I will have to simulate from a jump diffusion process.
In general, the stock price process is given ...
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Quanto basket payoff
I have a payoff that is the worst of the returns two indices: S&P500 (SPX) and Euro Stoxx 50 (SX5E).
$\pi = \min \left\{\left(\frac{\text{SPX}_\tau-\text{SPX}_0}{\text{SPX}_0}\right),\left(\frac{\...
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How is the Chooser Option's value computed in this example?
In preparation for my finals, I am attempting a question on chooser options. One question asks
A European chooser option on an index ETF paying a yield of 3.0% with
strike \$64 has a maturity of ...
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Feynman Kac Formula for path-dependent options
Consier geometric Brownian motion: $dS_t/S_t=\mu dt+\sigma dW_t$
Feynman Kac theorem tells us that
the conditional expectation $v(t,x)=E[ e^{-rT}\Psi(S_T) | S_t=x]$ can be computed by solving the ...
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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: ...
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Basket derivatives on weather AND financial underlying?
Is somebody aware whether there exist basket derivatives whose underlyings are either related to weather (e.g. temperature) or financial indices (e.g. S&P500)? It is essential that the payoff ...
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Pricing and hedging fund-linked derivatives
I am looking for info regarding pricing, and hedging (notably vega and delta) of derivatives on funds.
Could you please confirm/complete the below information I believe I've understood so far, or ...
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What exotic options are exchange-traded?
There are a number of exchanges that trade vanilla Call/Put American/European options on various underlyings (equities, indices, futures). There have been some trading in digital options on certain ...
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What is the stochastic differential of a general semimartingale?
By using the canonical representation of a semimartingale in Eberlein, Glau and Papapantoleon's "Analysis of Fourier Transform Valuation Formulas and Applications", on page 3:
$$H = B + H^c + h(x) \...
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Why are exotic options most popular in FX?
I was reading Derman's latest blog post on Vanna Volga pricing, which, according to the linked Wikipedia article, is used mostly for pricing exotic options on foreign exchange (FX). This Willmott ...
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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 ...
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Implied Volatility for Asian option
I am new to the topic of Asian options. Assume I want to price an Asian put (fixed strike, discrete average) in the Black Scholes world. I know implementations to calculate the value but what is the ...
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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) ...
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Is it possible to model path-dependent clauses using finite difference methods?
I'm trying to build a convertible bond pricer. In my case a convertible bond is a complex derivative with call, put and conversion price reset clauses, and all of the clauses are triggered in a path-...
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Key Rate Duration for MBSs greater than Key Rate Tenor
Key Rate Durations (KRD) are essentially some fixed income instrument's price sensitivity to a non-parallel shift in interest rates (i.e., a shift at the "Key" Rate). For example, a 10-year bond's ...
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What's the typical markup on quoted exotics, and what drives this premium?
I'm curious about the typical markup on quoted exotic options as well as what drives this premium.
You call up an options desk for a quote, and they'll give you a spread that reflects their market on ...
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Monte Carlo approximation of call option on the maximum of two assets
I want to compute the price of the option with payoff
\begin{equation}
\max \big\{\max\{S^1_T, S^2_T\} - K, 0\big\},
\end{equation}
where $S^{1,2}$ have the same dynamics with 0 correlation. So,
\...
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What Positions on an Underlier CANNOT be Hedged with Vanillas?
Say I have infinite precision of strikes $K$ (continuous world $dk$) and expirations $T$ (continuous $dT$) all with liquidity (so no practical limitations). What positions in an underlying can't be ...
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Flaw in the following argument with Binary Options and Skew
A Binary option is ATM and expires tomorrow. If the skew of the vanilla options steepens (left side up, right side down) what happens to the price of the Binary Option.
I know that using a ...
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1
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Pricing of European options on two underlying assets
Is anybody able to give the solution to the following problem?
Suppose we have two assets, each of which follows a GBM process, and where $dW_S$ and $dW_X$ are correlated $(dW_SdW_X=\rho)$.
$dS=\mu_s ...
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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=(...
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Structuring and Customization
It seems complex derivatives in particular exotic options are not available at any retail broker. Can a regular retail trader get access to these instruments? Maybe through prop firms or banks? ...
user57027
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1
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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 ...
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Is the asset-or-nothing call option in this example valued incorrectly in the Black-Scholes framework?
I understand the solution to the author's example below, but I can't help but notice that the implied volatility is an imaginary number:
The time-$t$ price of an All-or-nothing Asset Call is $S_t e^{-...
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Best way to do multithread Monte-Carlo in QuantLib
QuantLib has great facilities for Monte-Carlo pricing engines, classes McSimulation and MonteCarloModel do a lot of work. But they do it in a single thread. What is best way to introduce parallel run ...
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1
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Floating Strike Lookback Delta Risk
I'm running through some delta hedging simulations of floating strike lookback call options (that is, I'm short the options) during a volatile (downside) period for the underlying and some very odd ...
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hedging barrier options
Consider Black Scholes dynamics for the stock price
$$dS_t=\mu S_tdt+\sigma S_t dW_t$$
I have "heard" it is difficult hedging barrier options if the payoff suddenly is set to zero by the boundary ...
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3
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Pricing exotic option whose payout depends on the stopping time
I am struggling with this question:
Let $B$ be a standard Brownian motion. In a Black-Scholes model, at time $t$, the stock price is given by
\begin{equation}
S_t = \exp \{ \sigma B_t + ( r- \frac{1}{...
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1
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Vanna vs volga and vega
So the bloomberg article that I'm referring to (Bloomberg. Variations on the Vanna-Volga Adjustment. Travis Fisher. Quantitative Research and Development, FX Team. January 26, Version 1) states that ...
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1
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Bloomberg scripting language (BLAN)
Did anyone work with Bloomberg scripting language (BLAN is the name I guess). If so is it really flexible and is it competitive with other valuation services (say Super Derivatives). Does it enable ...
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Single barrier options in stochastic volatility models
In this note/sketch, I derive among others a closed-form formula for an up and in put (UIP) in stochastic volatility models of the form
$$
dS(t) = \sigma(t) S(t) \left[ \rho dW(t) + \sqrt{1-\rho^2} dZ ...
user34971
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0
answers
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
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PDE pricing of barrier options in BS
Path-dependent options in BS framework is intuitive to price with monte-carlo under risk-neutral measure, however it appears that several kinds can be priced with PDEs. I understand how does the story ...
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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 ...
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1
answer
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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?
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Kingdom of Denmark Nikkei put warrants [closed]
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 the Nikkei index (and paid in Yen) and combining them ...
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1
answer
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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 ...
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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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