Questions tagged [pricing]
The pricing tag has no usage guidance.
385 questions
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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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2
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355
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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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1
answer
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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 ...
- 2,662
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votes
2
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3k
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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
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735
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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
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118
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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
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1
answer
215
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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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2
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305
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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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vote
1
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238
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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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4
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2
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385
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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 ...
- 1,043
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vote
1
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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. ...
user52981
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2
answers
2k
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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
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1
answer
276
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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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1
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107
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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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1
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124
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Quantlib error initializing CapFloor C++ Class
I'd like to use QuantLib as a C++ library to price interest rate derivatives, in particular Cap&Floors. To semplify things a little, let's say I have a vector of EURLibor1Y rates for different ...
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0
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Why are futures contracts on the secondary market described as having 1 price, instead of 1 price for contract buyers and a 2nd price for sellers?
I'm first going to describe how I believe the futures contract mechanics work, and please correct me where I'm wrong:
A contract seller (in a short position because usually they don't actually ...
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1
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683
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Delta of a forwards contract
in university's lecture notes, from what I understand using the replication of portfolio principle to price derivates, the forward price of a contract K should be: $K = P_0(1+r)$ where $P_0$ is the ...
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0
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173
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Why do I get different results from different credit pricing engines in QuantLib
I am trying to use three credit pricing engines: IsdaCdsEngine, MidPointCdsEngine and IntegralCdsEngine but I am getting different NPV results from each of them. The case is like this: When I have as ...
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1
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229
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No-arbitrage arguments: how do additional fees affect futures on an index?
I am considering a fund that replicates the returns of an index minus a fee, using the following case-study my lecturer used regarding SPY:
In practice, futures and forwards can be written on assets ...
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3
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414
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Are there really closed-form pricing formulas? [closed]
Good morning to all,
I wanted to post this question here hoping to have more details.
The concern, in my opinion, comes from the fact that the concept of "closed-form" is not clear. Because, ...
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0
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255
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CMS Convexity adjustment with negative interest rates
I need to price bonds with CMS-linked coupons. In order to determine the convexity adjustment to apply to the forward rates, I would use the formula that appears in Hull's Futures, Options and other ...
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0
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74
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Historical data on valuations for internet companies during dot-com bubble
I am looking for data on historical valuations for internet companies during the years of the dot-com bubble (2000 - 2002). I know that big auditors have or at least have access to such data on ...
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1
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2k
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DV01 on LIBOR vs. SOFR basis Swaps
If I had entered into a USD 10mn pay SOFR, receive 3M LIBOR swap with a 5yr maturity, I would have had a positive NPV of about 80k by the beginning of March due to the massive drop in SOFR (1.55 to 0....
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When you rollover a FX Forward, do enter the FX swap at the spot rate or previous forward rate?
from below link:
https://www.linkedin.com/pulse/distinction-between-fx-swaps-currency-risk-management-akubue-cfa/
"if the date of settlement of the export proceeds has been extended by three ...
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150
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Price a contingent claim with payoff $(S_T-K)1_{\{S_T>K\}}1_{\{L\leq X_T\leq U\}}$
I'd like to price the following contingent claim using a copula model.
$$V_T = (S_T-K)1_{\{S_T>K\}}1_{\{L\leq X_T\leq U\}}$$
where $S$ and $X$ are two stock price processes which follow a non-flat ...
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1
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128
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Copula analytic formula for $max(S_T^1 - K, 0) 1_{\{L<S_T^2<U\}}$
Consider the payoff function
$$ V_T = max(S_T^1 - K, 0) 1_{\{L<S_T^2<U\}} = (S_T^1 - K)1_{\{S_T^1 > K\}}1_{\{L<S_T^2<U\}}$$
where $S_T^1$ and $S_T^2$ are two GBM distributed stocks with ...
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3
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431
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FX swap par value
What is the relationship to apply so that an FX swap value is 0 at inception?
For example, for a short 1y EURUSD swap with 1mm euro notional, at inception spot = 1.1000 and 12m fwd = 1.1022, EUR 1y ...
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2
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What is IV % actually measuring? [closed]
If the Implied IV of an option is 40%, what is the 40% representing, 40% of what?
Does that mean the underlying stock is estimated it may move up or down 40% in a day, month year?
The option price may ...
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1
answer
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Premium of FX Option with American Barrier [closed]
I have been trying to understand how to price FX options with barriers. In Hull (Options, Futures, and Other Derivatives), there are closed formulas how to calculate the premiums of European Call and ...
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3
answers
372
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Using Quantlib to pricing a FR007 swap (which is compounding interest rate in floating leg)
You can treat the FR007 swap like this:
The fixed-rate leg is the same as the fixed-rate leg of the LIBOR swap.
The floating rate can be treated as the combination of some 3-months maturity compound ...
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1
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764
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Monte Carlo simulation for OTM options under stochastic volatility
I'm looking to simulate the stochastic price and volatility process (Heston model) using some form of Euler method for Monte Carlo approximation of option prices. The results that I get are acceptable ...
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1
answer
2k
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Valuation of Corridor Variance Swaps
Given that the payout of the Corridor Variance Swap (CVS) is $V \left(\frac{\sum_{n=0}^{N}I}{T_2 - T_0} (\sigma^2 - K^2) \right)$, where $\sigma^2$ is the realized variance within the pre-specified ...
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2
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480
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Appropriateness of the Bloomberg CLO Cashflow Generator
Since CLOs seem to gain in popularity because of the COVID-19 crisis, I came across the possibility in Bloomberg to generate cashflows for newly issued CLOs through the function "weighted average ...
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1
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232
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How to construct a GBP FVA curve from a USD FVA curve
Our business funds itself in 2 currencies, USD and ZAR. As a consequence we have a USD funding curve. I need to price a GBPZAR cross-currency swap (XIRS) against a counterparty with which we have no ...
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1
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No-arbitrage Pricing
We have a contract whose value is $A(S_t,t) = S_t^3$ at all times, not just at expiration. $S_t$, the underlying stock, follows a Geometric Brownian Motion, $\frac{dS}{S} = \mu dt + \sigma dB$. How ...
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If I have the present value of an amortizing bond's cashflows, how do I figure out price?
Say that I correctly compute the sum of the cash flows of a given bond. How does this relate to the quoted price that most people understand? For example, based on the stream of cashflows of a bond ...
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2
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364
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Autocall pricing: what does "Lipschitz continuous parameterization" mean?
I've been reading through this research paper (A Monte Carlo Pricing Algorithm For Autocallables That Allows for Stable Differentiation by T. Alm, B. Harrach, D. Harrach, M. Keller) about a method for ...
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What book(s) would you recommend for structuring and pricing Exotic Products?
I've been looking for good books on structuring equity derivatives (Principal Protected Notes, Autocalls, Lookbacks, Reverse Convertibles etc). I only found ones that discuss mainly the theoretical ...
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Pricing of autocallable structured product
I'm looking at this paper: https://doi.org/10.1057/jdhf.2011.25, which is on pricing autocallable structured product. The author uses the Black-Scholes equation to describe the product's dynamic value,...
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Can arbitrage arguments be rearranged to avoid selling? (Hull, Chapter 5)
Suppose forward contracts are traded on a consumption asset, so there aren't necessarily people ready and willing to sell the asset to jump on an arbitrage opportunity. Suppose the asset has no yield, ...
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I have missing data on my portfolio weightings but it can be solved through stock prices - how can I code to find this? [closed]
firstly I would like to say sorry for the title - its not the best. In fact its crap.
Here is my problem (I am new to coding btw - still learning)
I am using Python on my MacBook - using Terminal.
I ...
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Why are some metals in contango (inverted) forward curve and some in backwardation (normal) forward curve?
I am scrolling through the various metals on lme.com and some are in contango and some in backwardation. For example:
Copper: backwardation
Aluminium: contango
Further examination of other metals ...
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0
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304
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Stocks with same volatility but different drifts
In the book Quant Job Interview Questions & Answers, in section 2, question 2.4 says suppose two assets in a Black-Scholes world have the same volatility but different drifts. How will the price ...
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0
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169
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Linear factor representation Pricing kernel APT
following Cochrane (2005) and other insights, we know that under Arbitrage Pricing Theory (Ross, 1976), if investors believe returns follow a linear multifactor structure of the form
$x^i=r^f+\sum_{j=...
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Market Maker option's pricing with reference spot
When a option's market maker receives a quote from a broker, usually the underlying spot prices is locked with a reference.
Let's suppose the following example:
Broker: "Buy 10k call 2800 of ABC ...
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628
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Quantlib: How do I price a bond after having built a term structure
I below are my codes using QuantLib to build a term structure
What I would like to do is use that to price any hypothetical bond lets say
startdate : 8 Feb 2016
end date : 8 Feb 2021
coupons : 10% ...
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2
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1
answer
364
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Modelling Geometric Browian Motion price model with stochastic volatility
I'd like to generate scenarios (simulate several paths of the process) for several stocks using multinomial Geometric Brownian Motion under Stochastic volatility assumption. I'm going to use it in my ...
3
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0
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113
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Operator splitting method on three assets black scholes equation
Currently I am studying finite difference method on derivatives with three (or more) underlyings and little bit confused on operator splitting method because two papers have different result.
For the ...
3
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3
answers
1k
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Which measure is used to price a swap?
When we value the floating leg of a standard vanilla swap, we replace the expectation of the future floating rates by the forward rates known today. However my understanding is that the forward rate ...
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0
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74
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Confused about discretization
I am reading a paper here: https://pdfs.semanticscholar.org/5f91/2d46b02b03230a4ffaaa42d655b2b6147d56.pdf
The following is my confusion.
The paper has the following continuous time model for the price ...
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