Questions tagged [option-pricing]
Questions about models for the valuation of option contracts.
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What are the rules for quoting option prices on the market?
I have implemented a monte carlo pricer for an option. I simply don't know how many decimals I need to include in the quoted price. Can anyone please provide guidelines?
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Debunking risk premium via "hedging" argument? (or why even in the real world $\mu$ should equal $r$)
Since I began thinking about portfolio optimization and option pricing, I've struggled to get an intuition for the risk premium, i.e. that investors are only willing to buy risky instruments when they ...
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How do I estimate convergence in monte carlo methods?
I am experimenting with Monte Carlo methods. I'd like to measure/estimate convergence with a graph/chart.
How do I do that? Can anyone please direct me to relevant documentation/links or even give me ...
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How to scale option pricing components in regard to time
I am looking at closed-form options approximations, in particular the Bjerksund-Stensland model.
I have run into a very basic question. How should I scale the input variables in regard to time? My ...
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What are important model and assumption-free no-arbitrage conditions in options trading?
In the paper "Why We Have Never Used the Black-Scholes-Merton Option Pricing Formula" (Espen Gaarder Haug, Nassim Nicholas Taleb) a couple of model-free arbitrage conditions are mentioned which limits ...
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Transformation of Volatility - BS
I have recently seen a paper about the Boeing approach that replaces the "normal" Stdev in the BS formula with the Stdev
\begin{equation}
\sigma'=\sqrt{\frac{ln(1+\frac{\sigma}{\mu})^{2}}{t}}
\end{...
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What are some useful approximations to the Black-Scholes formula?
Let the Black-Scholes formula be defined as the function $f(S, X, T, r, v)$.
I'm curious about functions that are computationally simpler than the Black-Scholes that yields results that approximate $...
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Better understanding of the Datar Mathews Method - Real Option Pricing
in their paper "European Real Options: An intuitive algorithm for the Black and Scholes Formula" Datar and Mathews provide a proof in the appendix on page 50, which is not really clear to me. It's ...
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European turbo warrants
Totally new to the world of quant finance, so perhaps this is an odd question...
Does there exist an American equivalent to the German style "knock out zertifkate"? (The name might be slightly wrong....
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Formal proof for risk-neutral pricing formula
As you know, the key equation of risk neutral pricing is the following:
$$\exp^{-rt} S_t = E_Q[\exp^{-rT} S_T | \mathcal{F}_t]$$
That is, discounted prices are Q-martingales.
It makes real-sense ...
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Black-Scholes No Dividends assumption
I am doing some research involving black-scholes model and got stuck with dividend-paying stocks when evaluating options. What is the real-world approach on handling the situations when an underlying ...
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An equation for European options
So, any European type option we can characterize with a payoff function $P(S)$ where $S$ is a price of an underlying at the maturity.
Let us consider some model $M$ such that within this model $V(S,\...
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Software for decomposing payoff diagrams into plain vanilla products
Nowadays structured products (or packages) with complex payoff diagrams are omnipresent.
Do you know of any software, add-ons, apps, code whatever, that enables you to enter a payoff diagram or a ...
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Using Black-Scholes equations to "buy" stocks
From what I understand, Black-Scholes equation in finance is used to price options which are a contract between a potential buyer and a seller. Can I use this mathematical framework to "buy" a stock? ...
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Longstaff Schwartz method
I try to implemente the LSM method with this algorithm but my price is always too low. By example for an American put option with the following parameters:
S0 = 36, Strike = 40, rate = 6%, T = 1 ...
user595
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Methods for pricing options
I'm looking at doing some research drawing comparisons between various methods of approaching option pricing. I'm aware of the Monte Carlo simulation for option pricing, Black-Scholes, and that ...
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illiquid american options pricing
What are the standard methods to price american call/put options on illiquid underlyings?
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Which risk-free rate to use to price a bond issued in one currency but convertible into equity in another?
A convertible bond denominated in USD is issued by an Indian company (with equity traded in INR). The bond will be repaid in USD and if converted into equity in the company, the conversion price will ...
user480
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Simple model for option premium (for covered call simulation)?
Given a historical distribution of weekly prices and price changes for a stock, how can I estimate the the option premium for a nearly at-the-money (ATM) option, say with an expiration date 3 months ...
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What is the implied volatility skew?
I often hear people talking about the skew of the volatility surface, model, etc... but it appears to me that there isn't a clear standard definition unanimously used by practitioners.
So here is my ...
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Extensions of Black-Scholes model
For the Black-Scholes model my feeling is that the volatility parameter is like sweeping stuff under the rug.
Are there models which improve on the volatility aspect of Black-Scholes by adding other ...
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How to use binomial tree for portfolio of equity products
How can I use a binomial tree to price a European option that's based on a portfolio of equity products? I have volatility and correlation matrix of all underlying products?
Looking for a formula ...
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Probability of touching
For a vanilla option, I know that the probability of the option expiring in the money is simply the delta of the option... but how would I calculate the probability, without doing monte carlo, of the ...
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How to show that this weak scheme is a cubature scheme?
Weak schemes, such as Ninomiya-Victoir or Ninomiya-Ninomiya, are typically used for discretization of stochastic volatility models such as the Heston Model.
Can anyone familiar with Cubature on ...
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How do I price OANDA box options?
How do I price OANDA box options without using their slow and
machine-unfriendly user interface?:
http://fxtrade.oanda.com (free demo account) sells "box options":
If you already know what a box ...
user59
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Are there any new Option pricing models?
Back in the mid 90's I used the Black-Scholes Model and the Cox-Ross-Rubenstein (Binomial) Model's to price Options. That was nearly 15 years ago and I was wondering if there are any new models being ...
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Why does implied volatility show an inverse relation with strike price when examining option chains?
When looking at option chains, I often notice that the (broker calculated) implied volatility has an inverse relation to the strike price. This seems true both for calls and puts.
As a current ...
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