Questions tagged [pricing]

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B&S pricing of option with convex transformation

Assuming B&S world, is it possible to price an (European) option on a general transformation $f(\cdot)$ of $X$? What kind of assumptions should we make on $f$? Is convexity sufficient to find some ...
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-1 votes
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76 views

Does the usual theory (e.g. Black-Scholes) make sense for FX options?

When you open any book about option pricing theory, you have this kind of setting: A risky asset whose value at time $t$ is $S_t$. A risk-free asset whose value at time $t$ is $S^0_t$. A portfolio ...
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Pricing Options on Inefficient/Illiquid Assets

I'm currently trying to gather more information on option pricing in very inefficient markets for the underlying. By inefficient, I mean markets with consequential bid-ask spreads (5% or more) and ...
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Does the Lévy characterization imply that the price process of any asset is a Brownian motion?

While studying Brownian motion applied to mathematical finance, I came across these lecture notes by prof Steve Lalley. In the prologue, he gives this explanation for the occurrence of Brownian motion ...
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1 answer
30 views

How should the spread be determined after calculation of expected value?

Suppose I am willing to buy a contract which I believe has a 15% chance to settle to $100 and 0 otherwise. The EV of this contract is therefore 15. How much should I buy this for? I would answer at ...
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1 answer
76 views

Implication of unique risk neutral measure

I'm reading Shreve Stochastic Calculus II, theorem 5.4.9 (Second fundamental theorem of asset pricing), This is the part that confuses me : suppose there is only one risk-neutral measure. This ...
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1 answer
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Implied vs historical volatility in option pricing

I discussed recently with a trader who told me that put options are priced using historical vol, and call are priced using the implied one. My guess would be that as the put option market is much more ...
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2 votes
2 answers
201 views

Local Vol vs Stoch Vol Option Pricing

This is an interview question: Imagine you have a double knock-out barrier option: the current spot is 100, the lower barrier is 80, and upper barrier is 120. The barrier is continuous, meaning that ...
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1 answer
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Pricing for basic option strategies [closed]

If I am trying to price a strategy, say for example a call spread where we are long a call, strike L and short a call strike M, would the pricing formula simply be the Black-Sholes price for the Call ...
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1 vote
0 answers
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How do market makers calculate bid/ask prices to quote for RFQs, specifically for stocks? [duplicate]

Say a client submits an RFQ to buy/sell 100,000 Apple shares. The market maker will respond with their bid/ask prices. My question is how are these bid/ask prices calculated by the market maker? Is ...
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1 answer
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Are the buy/sell demand, the underlying spot price and the time value, the only factors in futures contract price?

Are the buy/sell demand on the future contract, the underlying spot price and the time value (days to expiration and the accelerating decay in backwardation or rising in contango, coefficent ) are the ...
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What adjustments need to be made before a Monte-Carlo simulation can be applied for the exotic option $(L_{\text{domestic}}-L_{\text{foreign}})^{+}$

I just want to reassure myself that I understand why Monte-Carlo is the appropriate tool in computing the fair value prices for different options. Let's say we have a Tenor discretization $T_{0}=0<...
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0 votes
1 answer
153 views

formula for pricing bond-futures

Is anybody able to help me understanding why does $P_t(S)$ appear in the solution to the following problem; deriving the price of bond forward contracts? Thank you Given: $r_t$, the instantaneous ...
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1 answer
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Multi-stage dividend discount model using financial calculator

Instead of the wrote formula approach, this analyst shows that such problems can be decomposed into their cash flows at different points in time, which enables us to use ...
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-1 votes
2 answers
150 views

Why can’t delta’s be used to price double no touch options?

Here is the link to a MATLAB one touch option pricing calculator I used:OT I tried several inputs and I noticed that the one touch option price is approximately twice the delta of an equivalent ...
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1 vote
0 answers
80 views

Closed form expression for $\Bbb E(\mathbb{I}_{\{S_{1,T}>S_{2,T}>K \}})$

Is it possible to calculate analytically $\Bbb E(\mathbb{I}_{\{S_{1,T}>S_{2,T}>K \}})$, using the 2-dimensional normal probability function $\Phi_2$, where $S_{1,T}$ and $S_{2,T}$ follow ...
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1 vote
2 answers
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Option pricing using characteristic function

I'm currently on a mission trying to calculate option prices using the rough Heston model. I've found that this is usually done using the characteristic function of the model, but I must admit that I ...
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Why would one need forward prices to perform derivatives pricing?

I am trying to understand the purpose of inputs the software of my company is using. Amongst others it needs calibration instruments, a model type, initial values of the respective underylings and a ...
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1 answer
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How would I price out and set up a steepening yield curve strategy in which Im long 5yr UST and short 30yr UST futures [closed]

Curious if someone could help me out with pricing this trade idea, or just give me some general tips on a direction I need to head to go about this. I attached a photo if to see how I set up the idea ...
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0 votes
0 answers
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What is the convenience yield of Bitcoin?

Question What is the convenience yield of the cryptocurrency? Back-up Explanations According to the 4-page long research paper, Crypto carry, the widely varying funding rates of perpetual futures (...
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1 vote
1 answer
138 views

Pricing interest rate derivatives

In Sec. 3.2 here, Mandel deduces the price $P$ of a derivative on an interest rate $r$ obeys a PDE of the form$$\frac{\partial P}{\partial t}+\frac{1}{2}\beta^{2}\frac{\partial^{2}P}{\partial r^{2}}+\...
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1 vote
1 answer
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How to price a set of cashflows from which the buyer can choose one?

Lets consider an arbitrage free and complete Model.Let also focus the analysis on the discrete time setting.Assume you have a finite set of random Cashflows $\mathcal{A}$. That means all elements of ...
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3 votes
1 answer
209 views

Bootstrapping discount and forward curve (using ESRA) and price a vanilla swap

I am just starting to use Quantlib, and want to try and replicate the SWPM-functionality in Bloomberg, and price a vanilla 5Y EUR OIS. Below is the overall swap data used in BBG: Overall settings ...
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0 votes
1 answer
124 views

Pricing Dual Currency Bond with Forwards instead of Cross Currency Swap

i got the task to price a bunch of dual currency bonds (EUR/GBP/CHF/USD...) and i am a bit puzzled. As the notional of the bond is in EUR but the repayment is in USD, i assumed that for pricing ...
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3 votes
2 answers
248 views

Derivation of static replication formula

I know that a way of computing the price of a derivative paying $S^2$ at time $T$ is by making use of the following strategy: $V=\int_{0}^{\infty} s^2 \frac{\partial^2 C}{\partial K^2}(K=s)ds$ Where $\...
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Impact of Autocall frequencies on the price

Let's consider an autocall with yearly observation that pays a snowball coupon when the product reaches the autocall barrier. I am wondering what is the rational of the impact of frequency of ...
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3 votes
0 answers
102 views

Is completeness of a financial model relevant for derivatives pricing?

If a market model is complete then every derivative has a unique arbitrage free price. However we are not starting with a model but with a arbitrage free Model class $\mathcal{M}$ (E.g. the ...
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1 vote
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Schedule, Yield-to-Maturity, and NPV of Fixed Rate Bond from QuantLib Python

I would like to price a fixed rate bond using QuantLib Python. The pricing is fine, however I would like to understand how to extract the Yield-to-Maturity (YTM) of the fixed rate bond, that is, the ...
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0 votes
1 answer
216 views

Fixed Rate Bond Pricing using QuantLib Python

I have tried to price a fixed rate bond using Python QuantLib and I verified my answer using a DCF model. Below are my codes for the pricing of the fixed rate bond using Python QuantLib: ...
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-1 votes
1 answer
401 views

Difference arising between Dirty Price and NPV using QuantLib Python

I have used QuantLib Python to price a fixed rate bond. My codes are as follows: ...
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0 votes
0 answers
76 views

Which curves to use for different swaps?

How do we determine which curve to use for pricing different swaps, for e.g. I don't understand how following come: Interest Rate Swap (USD) Fixed: USD Treasury Floating: none CCS (USDINR) Fixed: ...
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1 vote
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Pricing of a tracker certificate on basket of index futures

i'm new to Quant Stack Exchange but i already saw that the quality of the answers is outstanding, however, i have a question for which i haven't found an answer yet: I'm looking for a pricing model/ ...
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0 votes
1 answer
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What is 450 pips below spot for USD - JPY currency pair?

I'm new to FX derivatives and I'm trying to price a derivative of USD - JPY pair at 450 pips below spot for USD - JPY. Let's assume that the spot is 109.36; would this mean that 450 pips below spot is ...
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0 votes
1 answer
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What is the way to calculate "Risky PV (Present Value)" (discounting including the probability of default) from bond yield curve?

Instead of using CDS spread to do risky discounting, I would like to use the bond yield curve. Can I directly use the discounting factors from the bond yield curve or do I need to figure out the ...
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0 votes
0 answers
166 views

Pricing of a barrier reverse convertible in python with monte carlo simulation

I'm a finance student and try to do the pricing of a given barrier reverse convertible. This has to be done by a Monte-Carlo-Simulation in Python. The underlying is a stock of ING Groep N.V. Strike ...
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2 votes
1 answer
78 views

FCFF of a stock and its derivatives

This is the table I have: I want to use the $FCFF$ to calculate the stock price, when I did this using the $DDM$ I got $£16$ as the stock price. I've never used FCFF before but I know there are a few ...
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13 votes
2 answers
308 views

Why do we need to split market and default information into 2 separate filtrations?

The reduced-form approach to modelling derivatives with credit risk normally assumes the existence of two filtrations: A market filtration $(\mathscr{F}_t)_{t\geq0}$ carrying market and economic ...
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0 answers
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Pricing bonds with different coupon frequencies

Suppose that I have to price a bond that pays fixed rate coupons every three months but all other bonds of that issuer pays coupons every six months. Furthermore suppose that the six months bonds are ...
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2 votes
1 answer
531 views

Risk Neutral Valuation, Drifts and Calibration

Lets consider a pricing model like Vasicek. Apparently, if you calibrate a derivatives pricing model to market prices this gives you risk neutral parameters. Its not clear to me as to WHY this will ...
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11 votes
2 answers
832 views

Differences between main classes of interest pricing derivatives models

There seems to be 3 main classes of interest rate pricing models: 1) Short rate models, 2) Heath Jarrow models and 3) Libor Market Model. My book doesnt seem to explain why we need all these different ...
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2 votes
2 answers
141 views

multi asset option pricing

Assuming option on each single asset can be priced by Black Scholes, i.e. both S1 and S2 follow GBM. The correlation between vol of S1 and that of S2 is rho. Assuming constant interest rate, no ...
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1 vote
0 answers
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Black 76 and Asian Style Options on Shaped Power Futures

I am attempting to price a monthly lookback option on the gen-weighted average price of power at a particular solar plant over a given month. If the option settles at hub H, am I right to shape the ...
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2 votes
1 answer
150 views

Backshifting Price Timeseries with Memory Preservation

In Advances in Financial Machine Learning the author makes a case for fractionally differentiated price returns in chapter 5. The reason is to both maintain memory and to generate a stationary time ...
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4 votes
2 answers
239 views

what does the cover page of Guyon and Labordere's Nonlinear Option Pricing represent?

It could be a bit offtopic, but I don't see the link between the contents of the book and the cover page. Thanks
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2 votes
0 answers
51 views

Valuing an electricity swap

A colleague of mine and I are debating how to price an electricity swap. Keeping in mind that electricity futures are delivered over a period of time rather than at a point in time, I maintain that ...
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5 votes
2 answers
264 views

Strategy of replicating a portfolio with payoff $\int_0^T \frac{dS_t}{S_t}$

Given the asset price $S_t$ which is defined as follows $$\frac{dS_t}{S_t}= r_tdt+\sigma_tdW_t$$ where $r_t$ is not necessarily deterministic. What is the strategy of replication of the portfolio with ...
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1 vote
1 answer
272 views

Pricing of forwards contracts

Of the courses I am taking in college this semester, two are Financial Mathematics and Derivatives. In each course, we learn different formulas to calculate the forward price of a forward contract. ...
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2 votes
2 answers
355 views

Quasi Monte Carlo and Brownian bridge (how to combine them)

I am trying to understand how quasi Monte Carlo (QMC) and the Brownian bridge (BB) can be combined to price an asset, but I am having a hard time understanding how. I am just considering a European ...
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2 votes
1 answer
101 views

COS Method and existence of density

Hey in the COS method we use characteristic function of $\ln{S_T}$ to price european options (by recovering density from characteristic function). But how do we know that density exists? For example I ...
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0 votes
1 answer
88 views

Misconception about replicating portfolio [closed]

I am solving a problem in which following payoff is provided: With $S_0=100$ and $T=8$. Looking at the payoff it seems obvious that it is replicated with two european put options ($K=100$ and $K=150$)...
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