Questions tagged [pricing]
The pricing tag has no usage guidance.
189
questions
22
votes
2answers
12k views
Cross Currency Swap Pricing in nowadays environment
Multicurve setting has now become the new paradigm for vanilla swap valuation. For the record I give here (without getting into too much details) the methodoloy for pricing Euribor3M swaps in this ...
21
votes
2answers
2k views
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 ...
17
votes
1answer
12k views
What is the reason for the convexity adjustment when pricing a constant maturity swap (CMS)?
I'm trying to wrap my head around pricing a Constant Maturity Swap (CMS). Let's imagine the following deal: 6m LIBOR in one direction, 10y swap rate in the other. The discount curve is derived from ...
15
votes
1answer
2k views
Is QuantLib more trouble than it's worth?
I'm just starting to work with QuantLib and wonder if I'm going down a very wrong path.
I'm working on a site that presents the visitor with a table of streamed real-time options data, including ...
14
votes
3answers
2k views
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 ...
13
votes
2answers
1k views
For which instruments performs SABR/LMM better than LMM?
For which class of instruments the SABR/LIBOR Market Model does perform better than the classical LIBOR Market Model?
The LIBOR Market Model
The LIBOR Market Model — also known as Brace, Gatarek, ...
11
votes
4answers
2k views
Why does it take so many lines of code to price even the simplest of options with QuantLib
I have been looking at QuantLib I am trying to figure out why I need to write so much boilerplate code even when pricing the "simplest" of European Options using the analytical Black-Scholes formula (...
11
votes
1answer
302 views
How to handle coupon payments when pricing a bond with an embedded option?
I'm using a binomial tree to price a bond that has an embedded call or put option.
On every node that has a coupon payment, do you include the coupon payment then max/min out the value, or do you max/...
10
votes
2answers
2k views
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}\...
10
votes
1answer
1k views
Price functions based on order book events
Assume some equity traded on a given exchange based on an electronic limit open-order book $B$ that makes sequential updates as a function of time $t$. What are "natural" or common price functions $P: ...
8
votes
4answers
8k views
Calculate Average Price, Cost, (Un)Realized P&L of a position based on executed trades
We have built an algorithmic trading software and need to calculate the following parameters for each position in our portfolio.
Average Price
Cost
Realized Profit & Loss
Unrealized Profit & ...
8
votes
2answers
3k views
Looking for a recommendation for a Fund Transfer Pricing modelling book
Recently I started working in a bank as a modeler, one of the possible topic is FTP - Fund Transfer Pricing.
After I studied that subject a little on wiki and read a website or two in that field I ...
8
votes
2answers
571 views
Efficiency vs. Robustness - To use a constant or not in single factor time-series regression?
Arbitrage pricing theory states that expected returns for a security are linear combination of exposures to risk factors and the returns on these risk factors. Betas, or the exposures of the security ...
8
votes
1answer
195 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 ...
7
votes
1answer
1k views
Arbitragefree Pricing: Q vs. P
I read that the Fundamental Theorem of Asset Pricing states, that a market is arbitrage-free if and only if there exists an equivalent martingale measure Q, under which the discounted asset price ...
7
votes
2answers
833 views
Which interest rate should I use for the discount rate in real-world pricing?
Suppose I want to compute the time value of money (present value, future value, etc). I need to put an interest rate into the calculation.
Which real world interest rate would best be used here, ...
7
votes
2answers
427 views
Is it true that pricing an IR swap doesn't require any stochastic model but calculation of the PFE of an IR swap would?
Pricing an IR swap doesn't require any stochastic model but calculation of the PFE for an IR swap would require the Hull White Model or any other stochastic short rate or forward rate model.
Is this ...
7
votes
1answer
18k views
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/...
7
votes
1answer
1k views
Sanity check - How to price callables
This question is meant as a sanity check whether i got the workflow right for pricing callable bonds. If anyone finds a mistake, or has a suggestion, please answer.
The workflow is:
For every call ...
7
votes
1answer
121 views
Calibration of nested pricing models consistently on two different classes of derivatives
Hi everyone, I'm programming in MATLAB and I have the following optimization problem in calibrating several nested specifications of pricing models.
Summary: I have two pricing models ($1$ and $2$, $...
7
votes
1answer
4k views
Correct way to calculate bond's Yield-to-Horizon
I'm creating some .Net libraries for bond pricing and verifying its correctness with a bond pricing excel spreadsheet (Bond Pricing and Yield from Chrisholm Roth) but I believe it calculates the Yield ...
6
votes
2answers
3k views
Free and tested optimization, statistical and visualization packages for C#
I am about to implement a variation of the LIBOR-Market-Model (complete with Least-Square-Montecarlo, calibration, pricing etc.) and decided to implement it in C#.
The implementation will involve ...
6
votes
2answers
256 views
Which quantitative tools are actually used for hedging energy price and volume risk?
I'm a finance professor and I am looking for someone with actual trading and risk management knowledge within the energy sector who can tell me about pricing and hedging energy (especially electricity ...
6
votes
0answers
139 views
The concept of an incomplete market
While skeeming the relevant literature and web-sites I noticed that mostly the concept of the incomplete market is reduced to the following statement
"A market is incomplete if there are more ...
5
votes
1answer
4k views
The effect of negative interest rates on derivative pricing
I am trying to get an overview of the impact on negative interest rates on financial products (in general). For the time being I distinguished the following products
Vanilla options
Exotic options
...
5
votes
2answers
269 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 ...
5
votes
1answer
173 views
Change of measure's impact on parameter value
This is a follow-up question on Price of a prepayment-based claim.
Consider a zero-coupon bond of maturity $T$ with price $P_0$ for which the borrower can reimburse the principal $N$ at any time $\...
5
votes
1answer
6k views
How to get real-time data for Fama-French model?
For Fama-French model we need SMB (small[market cap] minus big) and HML (high[book-to-market-ratio] minis low). I want to ...
5
votes
2answers
361 views
Foward-start option pricing
Consider a probability filtred space $(\Omega, \mathcal F, \mathbb F, \mathbb P)$, where $\mathbb F = (\mathcal F_t)_{0\leq t\leq T}$ satisfing the habitual conditions and is generated by $1 d $- ...
5
votes
1answer
118 views
Pricing in the Heston Model
The dynamics of the Heston Model is
\begin{align*}
\frac{dS}{S} & = \lambda \sqrt{\nu} d W^S \\[0.5em]
d \nu & = k (1- \nu )dt + \epsilon \sqrt{\nu} dW^\sigma
\end{align*}
where $\lambda$...
5
votes
1answer
2k views
what's the difference between Peak-Load pricing and price discrimination?
i just don't get it.
Peak-load pricing wiki page gives example:
in public goods such as public urban transportation, where day demand
(peak period) is usually much higher than night demand (off-...
5
votes
0answers
230 views
pricing option with two stocks
Let $\left(S_t^{(1)}\right)_{t\ge0}$ and
$\left(S_t^{(2)}\right)_{t\ge0}$ be the price processes of two stocks
with dynamics
$$ \begin{align}
& dS_t^{(1)}=\sigma_{11}S_t^{(1)}dW_t^{(1)}
\...
4
votes
1answer
2k views
What is the importance of alpha, beta, rho in the SABR volatility model?
I just read that SABR model is a stochastic volatility model, which attempts to capture the volatility smile in derivatives markets. The name stands for "stochastic alpha, beta, rho", referring to the ...
4
votes
1answer
77 views
Equivalence of Put Pricing Formulas
I have to show that:
\begin{equation}
P_{t,T}(K)=e^{-r(T-t)} \int_0^{\infty}\left(K-S\right)^+ q_T^S(S)dS
\end{equation}
is equivalent to:
\begin{equation}
P_{t,T}(K)=e^{-r(T-t)}\int_{-\infty}^{...
4
votes
1answer
1k views
How to price a bond at specified dates in QuantLib
I am wondering what's the most efficient way (i.e. the method which involves the fewest arguments) to price a bond at a specified date, e.g. a future date (as instance, 6 months from now) in QuantLib. ...
4
votes
1answer
141 views
How does financial institutions value European options in practice?
I am a little bit confused, or uninformed more truthfully, regarding how option pricing (Europeans only in this case) are handled in real life. Up to now I have acquired some theoretical knowledge of ...
4
votes
1answer
295 views
Eurodollar Options Stike Price > 100 bps
Looking at Eurodollar IR options market data coming down from CME, I can see a whole host of options where the strike is > 100 bps.
My understanding in this case is that puts will always be in the ...
4
votes
1answer
2k views
Pricing an interest rate swap using Eurodollar futures
I see this posted but no answer given. I think it would be a good idea if we have a question on here to illustrate an example of how to price an interest rate swap.
So far, I understand that that for ...
4
votes
1answer
5k views
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 (...
4
votes
1answer
128 views
Why risk-free interest is needed for Margrabe's Formula?
The source code for Margarble's formula in QuantLib is here. The implementation requires a forward price be computed:
...
4
votes
1answer
503 views
Yield for valuation of illiquid corporate bond
I am trying to value a illiquid corporate bond issued at a discount to face value by a privately held company in India. The corporate bond is a sinkable bond (amortizing principle) with coupon rate of ...
4
votes
1answer
176 views
Estimating investor's utility from the trades data
Is it possible to infer investor's utility function from the set of decisions she is making?
Let's assume for simplicity that the market consists of a single traded asset whose return distribution is ...
4
votes
1answer
2k views
How does Hanson's Market Maker (LMSR) work?
Implementing Hanson's Market Maker states:
If the market maker wants to quote a "current price", he can. The
current price for outcome 1 is:
$$
\mbox{price1} = \frac{e^{\frac{q1}{b}}}{e^{\frac{...
4
votes
1answer
289 views
Resources to read more about/learn how implied pricing works
I was looking at this video today:
http://www.cmegroup.com/education/interactive/webinars-archived/implied-price-functionality.html
on implied pricing. And am aware that implied orders/pricing ...
4
votes
1answer
267 views
Exposure calculation of a re-coupon swap
How to calculate the exposure of a recoupon swap (when the MTM of an i.r. swap is settled and the fixed rate is reset to the prevailing swap rate for the residual maturity).
It's used to reduce the ...
3
votes
3answers
880 views
Two different ways of pricing that leads to two answers
This question might appear trivial to many (considering the questions on this site), but I think it reflects something fundamental that I am missing.
To keep things simple, assume everyone is risk-...
3
votes
2answers
1k views
Does Fama French Three Factor Model Work out of Sample (after 1993)?
Does anyone know if the Fama-French three factor model has been re-examined empirically after 1993, when the original paper was first published?
I am asking because there seems to be considerable ...
3
votes
2answers
1k views
Why QuantLib computes the fixed-leg swap rate by this formula?
I'm trying to understand how QuantLib creates (bootstraps) a yield curve from a vanilla swap at the source level. I have the following test code:
...
3
votes
2answers
381 views
Basic question about bonds pricing
I decided to recap my knowledge in interest rates, and decided to start with Chapter 4 on interest rates (in 8th edition) of the Hull's book "Options, Futures and Other derivatives". In 4.3 the ...
3
votes
1answer
74 views
Problem at deriving Bachelier formula with interest rates
In the Bachelier model, I have difficulties with a certain step. I want to figure out the distribution of $S_T$, which is the price process in the Bachelier model.
So far I could state that ($\mathbb{...
