All Questions

0
votes
0answers
11 views

Paying Filipino workers in USD. What should the inflation rate be? [migrated]

I'm not sure where to ask and, since this is not Personal Finance, I'm gonna ask it here. Here's my situation: for the past 2 years, I hired and trained a team of Filipino workers. They are paid in ...
3
votes
3answers
144 views

Modelling HFT data

In the context of Market making, how important is recent trades? In general, would i be able to get away with just modelling the Limit Order Book (LOB) and the evolution of the LOB in order to ...
0
votes
0answers
33 views

Morton Asset Volatility after Taxes

I'm writing a paper on Debt Covenants and I'm looking at the Asset Substitution Problem. I was thinking about looking at asset risk deltas before and after issuing, namely ß Unlevered and the Implied ...
1
vote
0answers
52 views

Python book on derivative pricing

Are there any books that show how to price exotic options in Python with monte carlo methods? I am aware of two books by Yves Hilpisch, but in his books there are only simple options. I am struggling ...
-1
votes
1answer
39 views

Smoothing of Implied Volatilty

I'm using ATM 30D implied volatility in a model I'm building, but need to smooth out the data. Is the best way just to use exponential smoothing or are there any better alternatives?
0
votes
0answers
15 views

Should the unsecured loan ( for example Bilateral loan) be more expensive than a secured loan ( Bond repo) in the 1 year?

What i am trying to understand is, the Repo trader when he prices a Reverese repo to the sales team, how should it be priced? Usually Repo trader or ALM gets funded (FTP) by their Treasury Dept. ...
2
votes
2answers
45 views

Difference between volatility measures of a basket of assets

I am trying to understand intuitively the difference between two different measures of realized variance of a basket of assets. The first measure I am aware of is when you take the realized variance ...
1
vote
1answer
48 views

How to check if $ E [\exp \{ \int_0^t \frac{Y_u^2}{1+Y_u^2}du \}]< \infty $

$dY_t=2Y_tdt+2\sqrt{1+Y_t^2}dW_t$ where $W_t$ is $P-$Brownian motion (Wiener process). I have defined a new measure $Q$ where the Kernel density (In Girsanov theorem) is $$ \phi_t = \frac{Y_t}{\sqrt{...
3
votes
2answers
126 views

Application of Ito's lemma

Let $X_t$ be some stochastic process driven by wiener process ($W_t)$ so it can be expressed as: $$dX_t=(...)dt+(...)dW_t$$ Let $f(t,x)$ be some $C^2$ function. Define the process $Z_s=f(t-s,X_s)$ ...
0
votes
1answer
23 views

Do you use seasonally or non seasonally adjusted index in analysis

I am constructing an inflation factor that includes the gdp deflator, the PPI for finished goods, and a spot commodity index. Do I uses seasonally or nonseasonally adjusted historical series? Thank ...
3
votes
0answers
68 views

Market Portfolio Optimization

Consider the minimization problem $$\min\left\{\frac{1}{2}x^T\Sigma x - \lambda(\mu-r_f)^Tx\right\}$$ and assume the CAPM model, i.e. $$r_i-r_f = \beta_i(r_m-r_f) + \varepsilon_i$$ Assuming $\...
0
votes
1answer
44 views

Monte Carlo simulated price and Black Scholes Price are giving a huge difference in my Matlab code

I have written a script for showing Monte Carlo Price for a increasing N. But comparing with BS results , This indicates a huge difference. Where is the error? Function : function [cpay,ppay] = ...
0
votes
0answers
26 views

Reference Request: state of the art references on risk measures

apologies for the breadth of the question. Have tried to find on the forum a good list of references for 'the above' however haven't seen such. Keywords such as CVAR / spectral have not yielded a ...
0
votes
0answers
31 views

Is PD or LGD taken into account in credit ratings?

As far as I know sovereign country ratings by S&P and Fitch only take into account the probability of default of the issuer. They don't care about the recovery value of the sovereign country's ...
1
vote
1answer
26 views

Iron condor with positive vega

I am backtesting this Iron Condor before earnings. In the position summary Vega (Mid Quote) is -3.04\$ but in the chart below (IV vs Profit $) it's clearly shown that a decrease in volatility will ...
0
votes
0answers
13 views

Distribution of value at horizon

This is taken from the textbook Risk Management in Banking, and is in Chapter 18.2 So I'm confused at the Value at Horizon column in this particular table. How do I get 1004.7 ... ? Also, am I ...
0
votes
0answers
34 views

Fama French 3 model

I want to calculate monthly idiosyncratic volatility for the MDAX index which constitutes of 50 stocks. I use the Fama French 3 factor model for that. My dependent variable in the equation is the ...
0
votes
1answer
30 views

Calculate New Portfolio Weights Given Today's Returns

I'm looking for a formula to recalculate my portfolio's weights at the end of time $T$ given a vector of the asset weights at $T$, and a vector of returns at $T$ For example: weights = 0.2, 0.3, 0.5 ...
1
vote
1answer
28 views

Portfolio Variance - Explanation for equation : Investments by Zvi Bodie

Source: Investments 10th Edition by Bodie, Zvi. Page 227 Chapter 7 In Equation 7.17, the book breaks the variance into two parts. I can't seem to understand why the 1/n is represented outside the ...
1
vote
1answer
43 views

Probability ITM formula for options

Given a stock of price price and annual volatility annual_volatility, and given an option with strike price ...
1
vote
2answers
254 views

why gamma decreases when option is deep in the money?

Gamma decreases when a call option goes either deeper in, or deeper out of the money. That is due the demand for the call option. I can imagine the demand for the option would decrease as it goes ...
1
vote
2answers
46 views

LIBOR Market Model - tenors?

In the LIBOR market model, we have a bunch of forward rates $L_j$ on $[T_j, T_{j+1}]$ for some collection on $j$. My question is, is it the delivery dates or the time to maturities that are fixed? So ...
0
votes
2answers
41 views

how to derive the cost of carry formula

Can anyone explain why the cost of carry formula looks like this: $$F_0 = S_0 \cdot e^{(c-y)T}$$ ,where $S_0$ equals the spot price when $T=0$, i.e. today. $c$ denotes the cost of carry and $y$ the ...
1
vote
1answer
51 views

In search of nice (approx) function forms of the volatility of cumulative simple returns

Let's consider a period $t\in[0,T]$, and let the simple return over year $t$ ($1\le t\le T$) be $r_t$. Assume $r_t$ are iid normal. The cumualative simple return over the whole period $[0,T]$ is $$R_T=...
-2
votes
0answers
35 views

purpose of negative revenue

Can anyone explain negative revenue on quarterly reports? It is creating discontinuities when I compute growth rates. Here is some example from my SQL: ...
2
votes
2answers
81 views

Can the historical probability be the same as the risk neutral probability measure?

In particular lets consider a zero-beta asset $i$ (in the CAPM sense). Let $R_f$ be the risk free rate $R_i$ the return on the asset $i$ $R_m$ the return on the market portfolio $\beta=\frac{Cov(R_i,...
4
votes
1answer
70 views

How to express a process using Itos formula

Let $F(t,x)$ be the solution to the PDE $$ F_t(t,x)=aF_x(t,x)+\frac{1}{2}F_{xx}(t,x),t>0 $$ $$F(0,x)=g(x)$$ for some function $g$. Let $X_t$ be a process defined by $$dx_t=aX(t)dt+dW(t)$$ Now ...
1
vote
1answer
36 views

Intuition behind one factor Merton model for probability of default?

Let $Z$ be a standard normal rv, $Y_i$ be iid standard normals for $i = 1,\dots, n$, satisfying the relationship $$ X_i = \sqrt{p} Z + \sqrt{1-p} Y_i $$ In the one factor Merton model, we say that ...
4
votes
1answer
71 views

The choice of portfolio in the proof of the Black-Scholes formula

Consider a stock whose price $S$ satisfies $$dS_t=\mu S_tdt+\sigma S_tdW_t$$ for constants $\mu,\sigma$ and where $W$ is a $\mathbb{P}$-Brownian motion. Further assume that the stock pays out ...
-2
votes
0answers
20 views

I need good book about quant finance [duplicate]

Hi i want someone to tell me how to improve myself in quant finane , i start read for jean hull but i dont find enough explanation to mathematical things ,i realy need your help to find a good book ...
1
vote
1answer
73 views

Delta hedging/Gamma PnL

Suppose I am long USDIDR straddle with my start of the day delta being USD10m long IDR and USDIDR gamma being $5m. There is a 1% intra-day IDR strengthening, so my delta becomes roughly long IDR 15m....
1
vote
3answers
75 views

Can you model the LIBOR rate as a geometric Brownian motion?

i.e. The LIBOR rate is driven in the same way as a stock price in the Black Scholes model. For example let $R_t$ denote the LIBOR rate at time t. the stochastic differential equation (sde) would take ...
2
votes
2answers
108 views

How is volatility different from variance?

I always thought volatility was just variance ^ (1/2). Now I'm reading this book and it's saying that the two are different concepts. Excerpts include: Partly due to its use in Black-Scholes, ...
-1
votes
0answers
44 views

Euler scheme to simulate trajectories + Python Code

Question: Euler scheme to simulate trajectories of S + Python code to get independent trajectories of S? For solving a problem I have the following assumptions: stochastic basis (Ω,FT,(Ft)t≥0,P) ...
0
votes
1answer
44 views

Fama French 3 model factors for German equities

I want to calculate monthly idiosyncratic volatility for the DAX index comprising 30 stocks. I will use the Fama french 3 model. My question is whether I have to calculate these factors for each stock ...
1
vote
1answer
74 views

Good references on Heston Model?

I am looking for good bibliographic references on Heston Model and Stochastic volatility models in general. Does anyone know any good introductory/intermediate references on this topic?
1
vote
1answer
70 views

Modeling independent variables that have an asymmetric impact on the dependent variable

I'm trying to regress a dependent variable on an independent variable that has an asymmetric impact. E.g., the dependent variable is much more responsive to an increase in the independent variable ...
3
votes
0answers
55 views

How rapidly should estimated volatility and volume change for estimating market impact in small markets?

The cost of market impact is usually modeled as: $$ \Delta{P} = \delta \sigma (\frac{Q}{V})^{1/2} $$ Where: $ \Delta{P} $ is the change in price of the asset caused by the transaction size $Q$ $\...
3
votes
1answer
61 views

Fair value of a binary cash-or-nothing option with a barrier

I want to find the fair value of a European cash-or-nothing option that pays \$1 if $S_t>K$ and $S$ breached the level $M<0<K$, where $S$ is the risk-neutral process $dS_t=\sigma dW_t$. My ...
2
votes
1answer
33 views

Markowitz portfolio risk with PV01 instead of variance

As the PV01 ($= dpdy \times notional$) of a bond is a measure of its risk, as well as its price return variance, could we measure the risk of a bonds portfolio with the Markovitz portfolio variance ...
1
vote
1answer
43 views

Value-at-risk and Equity delta

How to validate value-at-risk calculation on an equity portfolio using equity sensitivities? I don't have trouble doing that for rates instruments or options but I don't know which underlying risk ...
1
vote
0answers
50 views

Poor results forecasting stock price volatility using Python's GARCH model

As far as I understand, forecasting stock price volatility should be more achievable than forecasting absolute prices or returns. It seems as though GARCH models are the traditional and most widely ...
0
votes
2answers
53 views

Financial forecasting and Optimal order submission [closed]

For instance, If i have a model that can accurately forecast 3s ahead, would the trading logic be rather trivial? I have fit a series of distributions to L2 data and believe I have a fairly good grasp ...
0
votes
1answer
58 views

Calculate asset allocation given “long and short” optimized portfolio weights

If the amount of capital that has to be allocated for each asset given the "long only" optimized portfolio weights is: ...
6
votes
4answers
170 views

Why does Kelly maximise $E[\log\space G]$ rather than simply $E[G]$?

Given $G=\frac {C_n} {C_0}$, with $C_0$ the initial capital and $C_n$ the final capital after $n$ trades, the Kelly criterion derives the optimal fraction of capital to invest in each trade, by ...
1
vote
0answers
32 views

Monte Carlo VAR with differente asset classes

I have found a very useful post regarding the use of Monte Carlo simulaton to obtain portfolio Value at risk, based on Cholesky decomposition, random variates, etc. This post I'm talking about is: Is ...
-1
votes
0answers
98 views

An interview question: Swap rates

Calculate the missing par bid and ask swap rates for the following tenors and briefly describe the calculation (assume the simple zero rate is linear interpolated, short-end (<1 years) is simple ...
1
vote
0answers
46 views

ATM strike Heston model

I'm thinking about the heston model. price of the asset $S^1=(S_t^1)_{t \leq T}$ fullfills the differential equation $dS_t^1=S_t^1(\mu dt + \sqrt{V_t} dB_t^1)$ the stochastic volatility is given by ...
-1
votes
0answers
28 views

Black Litterman - Sector rotation

I was wondering if anyone here have ever tried to introduce sector rotation with regards to the Black-Litterman model. I want to try to expand the BL model by introducing this feature, however I have ...
1
vote
0answers
29 views

Vasicek Short Rate

Consider a spot rate curve: 1% 1Yr, 2% 2Yr, 3% 3Yr. Suppose today issue a 3 year zero coupon bond, the price shall be 100 / (1+ 3%) ^3. My first question is, suppose the spot rate curve keeps the same ...

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