Questions tagged [pricing]

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How to derive the price of a square-or-nothing call option?

At maturity $T$, the holder of a "square-or-nothing" call option written on an underlying $S_t$ receives a payoff of the form  \phi(S_T) = \frac{S_T^2}{K} \pmb{1}_{\{S_T \geq K\}} = \begin{cases}\...
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Which interest rate model for which product

Given the multitude of existing interest rate models (ranging from simple to very complex) it would be interesting to know when the additional complexity actually makes sense. The models I have in ...
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Implementing a Fast Fourier Transform for Option Pricing

So, I'm in need of some tips regarding a small project I'm doing. My goal is an implementation of a Fast Fourier Transform algorithm (FFT) which can be applied to the pricing of options. First ...
273 views

Can the concept of negative probabilities be used to price a call option?

Edit: I'm a dumbass. The thing below is supposed to be just the motivation of asking. I want to ask for below and in general, hehe. Assume that we have a general one-period market model consisting of ...
198 views

FTAP a-la Harrison, Kreps and Pliska

I was reading the papers co-authored by Harrison, Kreps and Pliska, that initiated the formal research on the connection between pricing, martingale measures, arbitrage and completeness. I have some ...
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Pricing homogeneous Basket Default Swap

Consider a basket with $K=10$ names. Default times of the names, $\tau_k$, are i.i.d. random variables with distribution $P(\tau_k \leq t) = 1 - e^{-\lambda t}$. Suppose that each name in the basket ...
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The difference between Close price and Settelment Price for future contracts

What is the difference between Close price and Settlement Price for future contracts? Is there a defined rule for evaluating the settlement price or different rules are applied for each instrument/...
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How to derive Black's formula for the valuation of an option on a future?

I've got a question about 1976 Black Model and Bachelier model. I know that a geometric brownian motion in the P measure $dS_{t}=\mu S_{t}dt+\sigma S_{t} dW_{t}^{P}$ for a stock price $S_{t}$ leads (...
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Pricing interest rate swap in Ho Lee model

In Ho Lee model, assuming risk neutral probability is not exactly 0.5, would a change in the volatility of short-term rate affect the price of an interest rate swap? My intuition tells me no as ...
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What is the Most Efficient Way to Calculate the Internal Rate of Return IRR?

I have built a program that prices financial assets and it does this in part by calculating the IRR. The problem is that it does not run as quickly as I would like it to. I currently use the Newton-...
523 views

Do FRN's *always* trade on par on reset days, regardless if the issuer's credit quality has changed?

I keep reading that floating rate notes trade on par on coupon reset days. Is this always true, regardless of changes in the issuer's credit quality since the FRN was issued? It seems probably ...
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Price of a prepayment-based claim

I am trying to determine the pricing formula for a given claim inspired in prepayment obligations backed by mortgage portfolios $-$ I believe these were popular in the eighties. The product ...
What is the filtration $(\mathfrak{F}_t)$ encircled below? Is it $(\mathfrak{F}_t) = (\sigma(W_t)) = (\sigma(\tilde{W_t})), t \in [0,T]$? Or is it \$(\mathfrak{F}_t) = (\sigma(\hat{W_t})), t \in [0,T]...