Questions tagged [finance-mathematics]

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31 views

About buying and selling a cumulative parisian options

I ask my question here because I want to know more about the cumulative Parisian options introduced by M. Chesney, Mr. Jeanblanc-Picué and Mr. Yor in 1997, then developed by Hugonnier in 1999 and F. ...
1
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0answers
24 views

The deflator of reinsurance market is unique

How to prove that the deflator $\phi$ of the reinsurance market is unique when working in the equilibrium model? That is, if we have a pricing function $\pi$, which satisfies: $$\pi(Y)=E(\phi Y)$$ ...
0
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1answer
59 views

Why do most interest rate formulas, and indeed finance in general, add 1 to a rate and then subtract afterwards? [closed]

For example, in the formula that shows the relationship between the nominal and effective interest rate shown below, 1 is first added to in/m and then 1 is subtracted from the result. What is the ...
3
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1answer
84 views

Hedging Value-Financial Mathematics

EXERCISE We consider a free from arbitrage financial market $(Ω,F,P,S_0,S_1)$ with $α<S_0^{1}\cdot(1+r)<β$,where $$0<α:=min_{ω \in Ω} S_1^{1}(ω), β:=max_{ω \in Ω}S_1^{1}, α<β$$ Let ...
3
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1answer
233 views

Equivalent martingale measure exists if and only if $a < S_0^1(1+r)< b$

Exercise : We consider a market of one period $(\Omega, \mathcal{F}, \mathbb P, S^0, S^1)$, where the sample space $\Omega$ has a finite number of elements and the $\sigma-$algebra $\mathcal{F} = 2^...
2
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1answer
125 views

Showing that a market model has arbitrage and describing martingales

This is an exercise which I came upon while studying an introduction to financial mathematics. Exercise : Consider the finite sample space $\Omega = \{\omega_1,\omega_2,\omega_3\}$ and let $\...
3
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1answer
471 views

Total Returns From Adjusted Close Prices

I'm trying to understand why the total return (return including dividends) that I get from calculating return using adjusted close price, does not equal the total return calculated in another manner. ...
1
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1answer
98 views

Approximation of Forward Rates in discrete time

The forward rate from time $t$ to $T$ ($f_{t,T}$) can be approximated by: $$ f_{t,T}= \left[ \frac{(1+r_T)^T}{(1+r_t)^t} \right]^{\frac{1}{{T-t}}}-1 \sim \frac{(1+r_T)^T-(1+r_t)^t}{T-t} $$ Why is ...
1
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1answer
128 views

Replicating portfolios [closed]

Prices of a stock are modeled using a two-period binomial tree, with each period being six months. The continuously compounded risk free interest rate is 7 % The stock pays 2 % continuous dividend. ...
1
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0answers
59 views

Pricing methods in the real world when there is more than one free arbitrage price

Perhaps this question sounds trivial and obvious, but I am starting to study this new field. When we are in a complete market without arbitrage opportunities there is only one risk-neutral martingale ...
3
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0answers
55 views

Price of a stochastic game between an agent and the market

In the article Pricing via utility maximization and entropy from Richard Rouge and Nicole El Karoui, they define the value function of the optimization problem as \begin{align} V(x,C) = \dfrac{1}{\...
2
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1answer
107 views
2
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1answer
111 views

The duality of the free energy and relative entropy used to deduce deduce the stochastic game between an agent and the market

I am reading the article Pricing via utility maximization and entropy by Richard Rouge and Nicole El Karoui. They talk about the relative entropy of a probability measure $Q$ with respect to the ...
0
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1answer
45 views

standard brownian vs brownian motion

We say Xt with paramters (µ,σ) is brownian process if (Xt-s - X t) ~N (µs,σ2 s) AMONG other conditons . Here we don't speak about any particular distribution for X t. We only say it is a brownian ...
2
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0answers
131 views

Pricing caplet with Bachelier (normal dynamic) using forward measure

I'm trying to price caplet with Bachelier under forward measure, but I can't find any solution. Remind that Bachelier assumed rates follow a normal dynamic. So here what I was doing : $C_t(T,T+d)$ ...
3
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4answers
351 views

Determine the right order size with market making strategy

In a market market strategy https://web.stanford.edu/class/msande448/2017/Final/Reports/gr4.pdf, how can we determine the right order size? Assuming I use a market making strategy and on a specific ...
1
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1answer
114 views

Cash Flow News and Discount Rate News + Return

I will appreciate If someone help me to understand how the final expansion is made. Specifically, how CF & DR are drived. This model is introduced by Chen et. al. (2013).What Drives Stock Price ...
3
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0answers
33 views

Utility Maximization on a finite Probability Space. Possible mistakes in a paper?

I am currently reading this paper on utility maximization in a financial market model. On page 5 the author starts with the case of a finite probability space and on page 19 he considers the ...
4
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1answer
410 views

Struggling with tau in Black-Litterman

According to the omega formula in B-L tau is used in the Omega estimation to determine the degree of uncertainty given to views of the investor: So, if tau is given a low value then the inverse of ...
1
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0answers
76 views

Dubious math in Thorp's magnum opus

I started reading Thorp's "Beat the Market" book and stumbled on a formula I can't figure out: https://imgur.com/a/xqfViKt What's the point in adding time to price and the whole probabilites ...
11
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1answer
650 views

Market Making Strategies Found by Hamilton-Jacobi-Bellman Equation

Im working my way through the book "Algorithmic and High-Frequency Trading" (AHFT) by Cartea, Jaimungal and Penalva and i'm curious to see how the market making model with an exponential utility ...
0
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1answer
95 views

Develop a pricing formula for an American digital put option

This problem comes from concepts and practice of mathematical finance by Joshi Chapter 8 problem 9. Develop a pricing formula for an American digital put option Joshi's solution - He states that ...
6
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1answer
355 views

Modelling EUR/USD rate with Ornstein-Uhlenbeck model

I have a data set of daily EUR/USD rate for time period 2000-2018. My goal is to model future behaviour of this financial time series using Ornstein-Uhlenbeck model: $$d X_t = \alpha (\theta - X_t) ...
3
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1answer
575 views

Change of numeraire in options with currency exchange features

FV of an EUR denominated option under "COP" risk measure is given by: $$V_t^{COP} = D^{COP} \mathbb{E}_t^{COP} \left[X_T(S_T -K)^+\right]$$ where $X_T$ is the exchange rate COP/EUR. Pricing the ...
1
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1answer
212 views

Negative VaR equivalent Volatility (VEV) and its meaning?

Can a VaR equivalent Volatility (VEV) as defined by KID/PRIIPS law be negative and what does it mean if it has a negative value?
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0answers
37 views

Literature recommendation subordinator models

I'm looking for relevant papers covering subordinator models for stock price modelling. I have alreay read the paper 'A Subordinated Stochastic Process Model with Finite Variance for Speculative ...
1
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1answer
109 views

Finding the process of $X/Y$

This comes from Mark Joshi's concepts of mathematical finance exercise 4 chapter 11. If $$dX_t = \alpha X_t dt + \beta X_t dW_t$$ $$dY_t = \alpha Y_t dt + \gamma Y_t d\tilde{W}_t$$ with $W$ ...
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1answer
40 views

Calculate min. win ratio needed for a bet to be profitable [closed]

If a bet 12000 to win 4000 my risk/reward ratio is .33 . How often must I win the bet to be profitable? I know it's 75% but have not found the formula yet.
2
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1answer
91 views

Mathematical definition of a hedge?

For two given portfolios/trading strategies I want to know what criteria need to fulfilled in order to call the one portfolio a hedge to the other. In other words; what is the mathematical definition ...
7
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2answers
500 views

Stop-loss start-gain paradox: Why is it a 'paradox'?

The Stop-Loss Start-Gain Paradox and Option Valuation: A New Decomposition into Intrinsic and Time Value, by Peter P. Carr and Robert A. Jarrow, in The Review of Financial Studies, Volume 3, Issue 3, ...
6
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2answers
3k views

Long Gamma vs Vega

What is the difference between being long gamma and being long Vega? I understand that gamma is the vol of delta and that vega is the vol of the underlying. However, I have also found that being long ...
2
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3answers
125 views

Does longer time horizon necessarily imply reduced risk?

Is there a mathematical/statistical basis for the commonly-held belief that the longer certain assets (particularly equities) are held, the less risk the investor is exposed to? Alternatively, is ...
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0answers
39 views

Evaluating contract $D$ where the stock follows the Black Scholes assumption

Ch.7 Mark Joshi Problem 14 A contract, $D$, pays $30\%$ of the increase (if any) of a stock's value in a year. If $S_t$ follows Black-Scholes assumptions, give a formula in terms of the Black-...
1
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1answer
60 views

4-point Trapezium rule for numerical integration

Background: This is in reference to Mark Joshi's concepts of mathematical finance ch.7 problem 11. Question: We have in the Black-Scholes model: $S_0 = 1, T = 1, \sigma = 0.1, r = 0$. A ...
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0answers
84 views

Anti-thetic sampling and second moment matching

Background: This is in reference to ch 7 problem 10 of Mark Joshi's concepts of mathematical finance. Question: A normal random generator produces the following draws: $$0.68, -0.31, -0.49, -0....
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1answer
50 views

Withdrawing monthly from a bank for 40 years [closed]

Consider you have $\$104107.4099$ in the bank with a $.33\%$ monthly effective interest rate. You plan to withdraw a fixed amount X every month for 40 years, such that you make 480 withdrawals in ...
0
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1answer
77 views

Properties of Brownian motion and filtration, Exercise 6.22, Joshi Concepts and applications to mathematical finance

Let $W_t$ be a Brownian motion, and let $F_t$ be its filtration then for $t > s$ we are asked to compute $$\mathbb{E}\left[W_t^2|F_s\right]$$ We have $$W_t = W_s + (W_t - W_s)$$ and $$W_t^{2} ...
3
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1answer
110 views

Mark Joshi, The concepts and practice of mathematical finance chapter 6 exercise 20,21

Find the Black-Scholes price of an option paying $$(S_T^{\alpha} - K)_{+}$$ at time $T$. Solution - The forward price is given by $$F_T(t) = e^{r(T-t)}S_t$$ So, $$F_T(0) = e^{rT}S_0$$ and $...
-1
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1answer
246 views

Mark Joshi, The concepts and practice of mathematical finance chapter 6 exercise 6 [duplicate]

Suppose a stock allows a geometric Brownian motion in a Black-Scholes world. Develop an expression for the price of an option that pays $S^2 - K$ if $S^2 > K$ and zero otherwise. What PDE will this ...
2
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1answer
350 views

Mark Joshi, The concepts and practice of mathematical finance chapter 6 exercise 4

Let an asset follow a Brownian motion $$dS = \mu dt + \sigma dW$$ with $\mu$ and $\sigma$ constant. The constant interest rate is $r$. What process does $S$ follow in the risk-neutral measure? ...
1
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1answer
2k views

What is an adapted process

I am reading Björk, Arbitrage theory in Continous Time and I have noticed that he uses the term adapted proces a lot. I can't seem to understand what an 'adapted proces' is by the wikipedia article. ...
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2answers
1k views

Implied Volatility of stock on Think or Swim

Think or swim has this thing where they have do a implied volatility of a stock. I have chatted with the TOS people but they aren't terribly helpful. Regardless they did send me two images of what ...
0
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1answer
70 views

How to calculate Chande Momentum Oscillator for FX

I am trying to calculate a momentum oscillator for the EUR/USD pair and am confused. A formula I read referenced the sum of previous up days. What is a "day" considered in Forex?
1
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1answer
144 views

Mark Joshi, Chapter 5 Problem 2 of The concepts and practice of mathematical finance

If $$dX_t = \mu(t,X_t)dt + \sigma(X_t)dW_t$$ with $\sigma$ positive, show there exists a function $f$ such that $$d\left(f(X_t)\right) = v(t,X_t)dt + V dW_t$$ where $V$ is constant. How unique is $f$...
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1answer
79 views

Problems with Money Weighted Rate of Return [closed]

The market value of a small pension fund’s assets was 2.7m on 1 January 2000 and 3.1 m on 31 December 2000. During 2000 the only cash flows were: Bank interest and dividends totalling 125,000 ...
1
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1answer
123 views

Can someone please verify or disprove this Sharpe Ratio math logic for me

I want to start by stating a problem that I wanted to figure out initially so that this all ties in somehow. I initially wanted to figure out if individual securities in an efficient portfolio all ...
0
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1answer
165 views

Joshi, Exercise 2.7 Concepts of Mathematical Finance

Let $D(K)$ pay $(S - K)^2$ if $S > K$, zero otherwise. Show that if $D(K)$ is differentiable function of $K$ then the third derivative w.r.t $K$ is non-negative. From what the hint in the book, we ...
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0answers
30 views

Bond price formula, redemption yield and no arbitrage

Given the 1 year bond with a price 98 and C as 8% on face value 100. I want to find the implied single compounding interest rate. I can solve for r via the bond price formula or I can just set up ...
1
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0answers
49 views

Force Index EMA calculation for stock indicator

I am trying to smooth a 13 period EMA Elder Force Index in c++, and nobody really describes this as anything more than : ...
4
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0answers
117 views

How to find a probability of VIX moving from one price to another

I asked a similar question on here with a bounty. I decided to modify the question to simplify what I am trying to do. Is there a package on MATLAB or some other tool where I can find the probability ...