Questions tagged [pricing]

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doubt about basic difference [closed]

Can some one explain Basic difference between hedgers, speculators and arbitrageurs and their approach towards derivative pricing. And also explain what do we mean by zero arbitrageur in the context ...
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Pricing Leveraged ETF option based on base ETF

I am following along with the paper linked here: https://math.nyu.edu/~avellane/thesis_Zhang.pdf . In section 4.4, equation (4.4.2) makes the claim: $$\sigma(k) = |\beta|\sigma_s(S_0k^*)$$ where: $$...
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1 answer
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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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2 votes
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125 views

Market practice to simulate IR curves, FX and cross currency basis for Counterparty Credit Risk

I have read that when computing Counterparty Credit Risk banks need to simulate the risk factors with Monte Carlo and reprice the deals under each scenario over the simulation period and then compute ...
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Volga Vanna Pricing Approach

So when using this method to price exotic options , it's stated that we need to calculate the vanna (how vega changes with respect to change in spot prices) of the exotic option and the volga ( how ...
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3 votes
1 answer
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Convergence of crypto perpetual futures

Perpetual contracts are supposed to track the spot prices through the funding mechanism. Typically, if the future has traded above the spot in the last averaging period used to compute the funding, ...
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Crypto perpetual futures (swaps) pricing away from instantaneous moment of funding

Most perpetual futures offered by crypto exchanges employ a funding payment mechanism, that acts to periodically return the price of the perpetual to the underlying index price. The mechanism is ...
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Tree Pricing FRN Implementation

When pricing a bond via a short rate model on a tree, it seems natural to include intermediate time steps in addition to those corresponding to cashflow dates (i.e. for bonds with American style ...
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6 votes
3 answers
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What are some interesting recent machine learning related developments in the QF domain?

In 2020 I wrote a MSc thesis on the hedging of exotic options using recurrent neural networks (loosely based on the paper Deep Hedging (2018)by Buehler et al.). Since then I have been interested in ...
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Utility indifference vs Quadratic hedging for incomplete markets

What is the difference, if any, between the quadratic hedging and utility indifference approach to pricing/hedging in incomplete markets?
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1 answer
133 views

Why is there a lot of focus on derivatives pricing and much less on stock pricing?

I am a quantitative finance student, and during the first year of this Master’s Degree I couldn’t help but notice that there’s a lot of focus on derivatives pricing and little or none on stock pricing....
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Quantlib python convertible bond pricing

I'm trying to price a convertible bond using quantLib library in Python but I can't seem to build the convertible bond object with ql.ConvertibleFixedCouponBond function. I get this error message, ...
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8 votes
4 answers
458 views

How to fundamentally value cryptocurrencies?

Investing in cryptocurrencies is a wild ride. There is obviously a lot of speculation involved but my question is another one: what are good models to evaluate the fundamental value of ...
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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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2 votes
0 answers
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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
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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
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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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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
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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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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
162 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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0 votes
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
158 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
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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 votes
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
142 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
305 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
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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
276 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
108 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
264 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
483 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
79 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
0 answers
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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
60 views

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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2 votes
1 answer
80 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
311 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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2 votes
1 answer
643 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
1k 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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