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Improving Models to Interest Rate Derivatives

I'm a beginner researching into what are the best practices and models generally used in industry to model interest rate derivatives. I would like some advice on models I can read about and ...
Naim Hussain's user avatar
1 vote
4 answers
194 views

Why are random coupons not priced using risk-neutral evaluation?

Assume a fixed coupon bond has a coupon which, randomly, is 5 % or 4 %, each occuring with a 50 % probability. The issuer flips a coin on payment date to decide which it should be. I would value this ...
JakcieJnr's user avatar
  • 131
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0 answers
39 views

Explicit pythonic building of Flat Forward Curve using Changes assumed from central bank meetings to price FRAs

This question is related to the following questions asked previously, primarily the first: Using QuantLib to build Flat Forward Curve using Changes assumed from central bank meetings to price FRAs ...
Naim Hussain's user avatar
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0 answers
43 views

Confusion About PFE Calculation and XVA Pricing Engine's Exclusive Reliance on Parameter Simulation

Potential Future Exposure (a credit risk metric) is calculated using $$PFE(\tau) = \text{max}\Big(0, \mathcal{P}_{derivative}(\tau) - CVA(\tau)\Big)$$, where $\mathcal{P}$ is the price / fair value / ...
A.L. Verminburger's user avatar
1 vote
1 answer
93 views

Using QuantLib to build Flat Forward Curve using Changes assumed from central bank meetings to price FRAs

What I am trying to do is price EURIBOR6M FRAs using a curve built in quantlib with changes in rate due to central bank meetings. For concreteness, my goal is to price EURIBOR6M FRAs, say 1x7 FRA, ...
Naim Hussain's user avatar
0 votes
0 answers
99 views

Master Thesis about Heston vs. Duan option pricing model

I would like to write my master's thesis on volatility in option pricing. My idea was to compare the stochastic volatility model of Heston 1993 with the GARCH option pricing model of Duan 1995. For ...
Aaron 's user avatar
0 votes
0 answers
53 views

Pricing a (general) callable floating rate note

I have a question generalizing this situation: Pricing Callable Floating Rate Note. I want to price a callable floating rate note, where the coupon can also be capped and the reference index can be ...
LoyoL's user avatar
  • 1
0 votes
1 answer
38 views

How to use the parity parameter when pricing third-party warrants with BS?

I attempt a second basic question. Let me know if https://money.stackexchange.com/ would have been more suitable for that. Third-party warrants are very similar to call options. One of their main ...
Sylvain Leroux's user avatar
0 votes
0 answers
41 views

Is the sign of the delta-gamma approximation error predictable?

I self-study quantitative finance, but I have a hard time connecting the textbook formula with the market reality and available data. I use delta-gamma approximation to estimate the price change of ...
Sylvain Leroux's user avatar
0 votes
2 answers
104 views

Survival probability interpolation between two time nodes

In the Open Gamma paper describing the ISDA CDS pricing model, it is mentioned that given the time notes of the credit curve $T^c=\{t_{1}^{c},...,t_{n_{c}}^{c}\}$ and that the survival probability for ...
Whitebeard13's user avatar
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0 answers
53 views

Pricing with log-normal interes rate

The annual rate of return in year $t$, denoted as $1+i_t$, where $i_0$ represents the interest rate from $t=0$ to $t=1$, has a log-normal distribution with an expected value $108\%$ and a standard ...
Miłosz 's user avatar
0 votes
0 answers
28 views

trade life cycle of a bond from proposal to settlement

How is the trade life cycle of a bond from proposal to settlement, in terms of who does what at a buy-side firm as a part of this process (e.g. at an Asset Manager, Hedge Fund, etc) different from the ...
capser's user avatar
  • 101
0 votes
0 answers
55 views

MMF/non-MMF share pricing and interest rate

For equities and bonds there are specific models to determine the intrinsic value of stocks/bonds, respectively, mainly following the idea that the stocks/bonds are worth the sum of all of its future ...
salomon's user avatar
  • 101
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0 answers
93 views

How do you calculate the market value of a bond position?

I got this question in an interview - and I answered it in terms of DVO1 and MTM positions in our Order management system. How would you have answered this question ? ...
capser's user avatar
  • 101
0 votes
1 answer
194 views

Understanding completeness in this simple one-period exercise

Let's consider a one period model (t=0, 1) with one risk-free asset that yields r, and one risky asset. $S_t^j$ will be the value of the asset j=0,1 at time t=0,1, where j=0 is the risk-free asset and ...
Confused Quant's user avatar
1 vote
1 answer
200 views

Find the right module for CDI DI BRL swaps valuation Quantlib

I'm trying to find a way to price BRL CDI Swaps with Quantlib but I can't find any solutions so far - so I was wondering if anyone encountered this issue: I don't see any solution on Quantlib. I ...
Gloomy's user avatar
  • 21
0 votes
1 answer
158 views

Quantlib FRA and interpolated rate in Swaps vs BBG valuation

I am building a CZK swap pricer on quantlib, and I am trying to understand my differences with Bloomberg pricing. I believe the way I set up my FRA is wrong, the reason is because even though I match ...
Gloomy's user avatar
  • 21
1 vote
1 answer
242 views

Quantlib - mismatch with BBG Swap

I'm trying to price a CZK swap via Quantlib with BBG data, so far nothing complicated but I can't seem to match the floating leg cashflows, and NPV, when I price my swaps, even if I find the right Par ...
Gloomy's user avatar
  • 21
0 votes
1 answer
103 views

Pricing an option with a certain payoff

Suppose an option with a payoff function $$ \max((1+k)S_1,kS_2) $$ where $S_1, S_2$ are stock prices and $k>0$ is a constant value. To value such an option, one would decompose this payoff function ...
math4biz's user avatar
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0 answers
22 views

State Price Densities vs PDF of Payoffs in Ait-Sahalia (1998)

At the start of section I in the paper, the authors talk about the difference between the SPD/risk-neutral PDF/equivalent martingale measure vs the PDF of payoffs. I understand that the SPD is used in ...
KaiSqDist's user avatar
  • 1,122
0 votes
0 answers
71 views

Pricing of a non-standard swap contract

Here I have a swap product, where a fixed and floating interest rate will be applied on notional amount. Fixed and floating legs involves 2 currencies, one of them is delivery currency (e.g. USD) and ...
Bogaso's user avatar
  • 802
0 votes
0 answers
165 views

Pricing a callable bond in a minimal way

I am looking for a minimal way to price callable bond from a defaultable issuer. The idea is to assume that we are in a deterministic world (i.e no volatility). I tried a methodology but I am not sure ...
mazalaza's user avatar
1 vote
1 answer
161 views

In the context of derivatives pricing, what are Pillars and Marking?

as the title says, I've heard of the terms 'Pillar' and 'Marking' in the context of fitting volatility smiles and derivatives pricing in general and I'm having difficulties finding definitions on ...
user619755's user avatar
0 votes
0 answers
40 views

Binary Signals and Combined Price Predicitions

Consider a binary signal $s(t)\in\{0,1\}$ for times $t\in\mathbb{R^+}$. Also define an asset price $X(t)$. Suppose that the curve, $E(r(t+h)\space|\space s(t) = 1) = \alpha (1 - e^{-\delta h})$ where $...
anonymous's user avatar
1 vote
0 answers
104 views

Convexity Adjustment for Average Rate IRS

Suppose that one want to price an Interest Rate Swap with daily averaging, i.e. the floating leg looks like $$Floating~Leg = \sum\limits_{i=1}^N P(T_i)\cdot\frac{\sum_{k=1}^m F(t_k, t_k+\delta)}{m}, ~...
Hasek's user avatar
  • 814
0 votes
1 answer
371 views

Carry for an Interest Rate Swap

I don't get why for calculating the carry of a spot starting swap I need to adjust the difference between the fixed rate and fixing by the Dv01? For example if I receive in a 5y swap and want to ...
Finance_student's user avatar
1 vote
0 answers
79 views

Par par asset swap counterparties in practice

In practice is it possible to enter into a par par asset swap where the bond is purchased from counterparty A and the swap element is conducted with counterparty B?
Workinghardtohardlywork's user avatar
2 votes
0 answers
90 views

Black-Karasinski & Market Price of Risk [closed]

I have implemented the Black-Karasinski model using trinomial trees and calibrated following Brigo (2007) page 29. However, the results do not fit the interest rate curve practiced in the market. As I ...
user3081005's user avatar
0 votes
0 answers
325 views

How to price an inflation caplet/floorlet using Bachelier Formula?

I am trying to recalculate the prices of inflation cap in order to calibrate a SABR model. I have this table which gives me the normal volatilities values in % for the different strikes and different ...
EOST's user avatar
  • 21
2 votes
1 answer
374 views

Incorporating the I-Spread and Parallel Shift for Accurate Bond Pricing

I am currently working on pricing bonds and intend to utilize the S490 curve sourced from Bloomberg. This curve is constructed exclusively using swap rates. However, I have encountered challenges when ...
TourEiffel's user avatar
2 votes
1 answer
142 views

What are the quantitative models for modelling the SOFR rate, the IR products when Libor rates end [duplicate]

Many year ago, I worked on the pricing of IR products (Floating rate swap, CMS swap, Cap, Floor,...) Libor rates are now replaced by SOFR rate. I would like to know What are the new IR products (...
NN2's user avatar
  • 1,008
2 votes
2 answers
824 views

Quantlib SOFR swap repricing across 2 different dates

I am trying to price SOFR swaps in two different dates (the same swaps, just different curves and dates) This are my initial parameters: ...
Lucas Triana's user avatar
1 vote
1 answer
220 views

Discounted price of an option

If the discounted price of any asset is a martingale under risk neutral measure, why is $E^Q[e^{-rT} (S_T-K)_+ | F_t]$, not merely $e^{-rt} (S_t-K)_+$? This is something I wanted to clarify, since ...
LAC's user avatar
  • 11
13 votes
4 answers
499 views

How to price very short dated options?

I was wondering if there is any industry standard in pricing very short dated options, from say 6h options down to 5 minute options. My thinking is that as time to expiry gets shorter and shorter, the ...
apocalypsis's user avatar
3 votes
0 answers
115 views

Options skew: when is a perfect fit desirable?

I'm still troubled by a rather basic question, namely when is a perfect fit to the vanilla skew really necessary? I think if you are trading vanilla options and/or Europeans that can in theory be ...
Frido's user avatar
  • 1,854
4 votes
3 answers
550 views

pricing in the case where payment currency and collateral currency are different?

I'm asking for the curve construction of the discount curve in the case where payment currency and collateral currency are different. If I refer to BBG, in the case of a USD swap collateralized in EUR,...
SIMO's user avatar
  • 51
1 vote
0 answers
77 views

Python Quant Lib - Bond Pricing ex coupon period [closed]

were wondering If anyone knows how to use rate bonds on Python Quantlib, that have an ex-coupon period. For example the link below shows the construction of such a bond in the c++ quantlib using ...
RD k3's user avatar
  • 11
2 votes
1 answer
246 views

Questions about the replicating portfolio in the binomial model

I'm starting to teach myself quantitative finance and I've got several questions (marked in bold) regarding the replicating portfolio of a security in the binomial model. I'm following, among others, ...
user_12345's user avatar
4 votes
1 answer
294 views

Calibration of Local or Stochastic Volatility Models to Prices vs Implied Volatilities

As the title suggests, what is the difference between calibrating an option pricing model (say the Heston model) to market option prices instead of computing their implied volatilities using Black-...
KaiSqDist's user avatar
  • 1,122
1 vote
1 answer
115 views

Basic question/clarification about the LOOP

This is a very basic question/comment regarding the way that the LOOP is stated in the book "Dan Stefanica - A Primer for the Mathematics of Financial Engineering". The proposition goes as ...
user_12345's user avatar
0 votes
0 answers
189 views

How to compute Vega in the Heston Model

I am computing European Option Sensitivity as: Delta, Vega and Gamma. I am using Heston Model to simulation spot and the variance. While computing Delta and Gamma, I understand, we need to bump spot ...
Garv's user avatar
  • 1
4 votes
2 answers
661 views

What does implied volatility say about the underlying?

Here's a question that's been on my mind on-and-off for some time now. It's well known that Black-Scholes is an unsuitable model for pricing in the current (post 80s) market as it fails to capture the ...
OJK's user avatar
  • 63
2 votes
1 answer
323 views

No expected return in Black Scholes formula: But how about the gamma?

A lot has been written about the fact that the expected return of the underlying asset is not part of the Black Scholes formula. I understand the argument that the performance of the underlying asset ...
equis's user avatar
  • 21
1 vote
1 answer
147 views

Bond Option: Cash Price or Quoted Price as Underlying

John Hull mentioned in his book using Cash Price(Dirty Price) instead of Quoted Price(Clean Price) in pricing a bond option using Black-Scholes. It confuses me as it seems more natural to assume the ...
League Super's user avatar
1 vote
0 answers
89 views

Calibration period

I want to calibrate some model to market data. This could fx be Bates, Kou, Black-Scholes, etc. So, for each model we have a set of parameters which need to be estimated through calibration. Now, my ...
CasMath's user avatar
  • 59
0 votes
1 answer
280 views

How to price PIK (paid-in-kind) coupon bond with option by the borrower to pay cash?

I'm trying to price a PIK coupon with an Embedded Option by the borrower to pay in cash. Without the Embedded Option, it is simply a zero-coupon bond paying Principal*(1 + coupon rate)^n at the end. ...
Andrei Sultanov's user avatar
1 vote
0 answers
86 views

What is the minimum price of an option, given no information about Greeks? [closed]

I was asked this interview questions for an analyst level structuring role and it has been bothering me since I can't figure it out: Assuming the price of an equity is 100, what is the minimum price ...
nicholaskong's user avatar
1 vote
1 answer
309 views

Does every process need to be a martingale under martingale measure?

From the pricing theory, processes need to be martingales when divided by the numeraire asset. A classical example is a stock option: Consider a money market $B$ being the numeraire asset. When we ...
user2743931's user avatar
0 votes
0 answers
58 views

Pricing of constant leverage certificates

I am trying to value the open-ended constant leverage certificates like Bull DAX 20x. As the certificates are reset daily with the movements of the underlying asset, how could they be modeled for ...
Tomas's user avatar
  • 151
2 votes
3 answers
663 views

Pricing a bond denominated in USD but issued in Europe

I need to price a USD bond using yield-to-maturity from the yield curve (YC). The bond is issued by a German company. My question is what yield curve should I use: the US Treasury YC or the EUR YC of ...
Rad's user avatar
  • 21

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