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1answer
1k views

Applications of PCA to yield curve analysis

One of the applications of Principal Component Analysis in Finance is to analyse the shape of the yield curve. But what conclusions can be drawn exactly from performing this exercise? Does it help us ...
1
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1answer
120 views

Prove Subadditivity - Entropic Value at Risk

Any insight in how to prove the following risk measure is subadditive? $\rho_{1-\alpha}(X) = \inf_{z>0}\{z^{-1}\ln(\frac{E[e^{zX}]}{\alpha})\}$, with $\alpha \in ]0,1]$ I want to prove it is a ...
1
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0answers
322 views

Constructing a hedging strategy for an American option

Question: Consider the following model, where $r=0$, and a dividend of 1 unit of currency is paid at time 1.5. $$ \begin{array}{|c|c|c|c|} \hline & S(0,\omega) & S(1,\omega)^* & S(2,\...
1
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1answer
900 views

How to compute the volatility for the Merton's Model for Private firm?

After one day of research i did not figured how to compute the input volatility for PRIVATE COMPANY in order to calculate the PD. My goal is to compute the PD of each of my company in my portfolio, ...
1
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1answer
2k views

pnl calculation of FX forward

i am trying to clarify the correct method of computing pnl (in base ccy) on an FX forward. let's assume the following notation: S(t) = spot rate at time t df(base,t) = base ccy discount factor (USD ...
1
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1answer
94 views

Variable Loan Interest Question

I have been attempting this question a few times over the past few days but can't seem to make any headway on it. Any help would be greatly appreciated. A loan of €L was to be repaid over a twenty-...
1
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1answer
100 views

How to measure the practicality of a market portfolio for long-term investment?

Do you believe that the composition of the market portfolio that you have found is a desirable or practical one as an investment? Explain why or why not, based on the positions of your stocks. I ...
1
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1answer
576 views

Is this the correct way to forecast stock price volatility using GARCH

I am attempting to make a forecast of a stock's volatility some time into the future (say 90 days). It seems that GARCH is a traditionally used model for this. I have implemented this below using ...
1
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1answer
90 views

How to manage risk on a call calendar when underlying is falling

Let us say I bough a call calendar spread. Now, at expiry of the short option, the underlying has decreased significantly, and I am approaching my max loss(i.e both the options are close to 0). In ...
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2answers
192 views

Calculating implied volatility from moneyness/volatility values for date

For an option expiring at a particular date I have Moneyness 0.4,0.7,0.85,0.95,1,1.05,1.15,1.3,2.5 Vol 0.105,0.075,0.045,0.045,0.202,0.045,0.045,0.075,0.085 ...
1
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3answers
520 views

At-the-money and volatility smile

In a volatility smile; why is the ATM point usually or ideally at the bottom? In other words, why is the "smile" smile shaped as opposed to another shape?
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0answers
121 views

Does it make sense to apply complicated mathematics to calculate with precision when the margin of error is +/-10%? [closed]

This is more of a philosophical question than general question. Quantitative finance applies highly complicated mathematics and has attracted very smart people to this field lately given the high pay ...
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0answers
102 views

AFV Model Implementation for Convertible Bonds

I am reading the original AFV model paper for pricing convertible bonds. https://cs.uwaterloo.ca/~paforsyt/convert.pdf The paper is very technical and I am having trouble finding the actual PDE's to ...
1
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1answer
219 views

PPPN: participation rate, stocks and premium

I'm a student of financial engineering and am very new to all of this stuff. Now, I'm trying to make an "example of a beginners exercise", but alas, I don't have any clue on how to solve or even on ...
1
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1answer
1k views

Zero-coupon bond price volatility with one factor Hull White interest rate model

I have been trying to understand the H&W model expression for zero coupon bond price volatilities: $\nu_B(t_0,t_M)=-\frac{\nu_r}{m}(1-e^{-m\tau_{0,M}})$, where $\nu_B(t_0,t_M)$ is zero coupon ...
1
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1answer
219 views

Upper bound option price in volatility dimension

All, I have a theoretical question about the value of an option when spot price goes to infinity as a function of volatility going to infinity. I know that for a call option: The option value ...
1
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2answers
136 views

How is the spread between the US-10 T-bond and the Fed funds rate determined?

In 2015 the Fed funds rate was 0.24%, while the US Treaury 10-year government bond was 2.24%. How is the spread determined? Is there a formula to determine the spread of the US-10 T-bond and the Fed ...
0
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1answer
5k views

Stub rate and first fixing in IRS

I have 2 questions that probably are related. Suppose there is an IRS that pays a 2% fixed rate every 6 months and receives the Libor 3 months (but paid every 6 months). The swap starts today (March ...
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1answer
2k views

Price of call/put is convex in $K$ (strike price)

Let $\lambda\in(0,1)$. Then $$C(T, \lambda K_1 + (1 - \lambda)K_2, S, t) \leq \lambda C(T, K_1, S, t) + (1 - \lambda)C(T, K_2, S, t)$$ $T$ - the maturity $K_1$,$K_2$ - Strike prices $S$ - stock ...
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1answer
131 views

What does “1-month horizon” mean in VaR calculations

For a simple equity portfolio, I need to compute historical 1-year simulation VaR with a "1-month horizon". I imagine this means I need to compute the 1-month return of the portfolio at each point in ...
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3answers
997 views

Parametric/Analytical VaR

Suppose I want to calculate VaR for a known distribution with mean $\mu$, variance $\sigma^2$ and $\alpha$-quantile as, $VaR_{\alpha}$ = $\mu + \sigma q_{\alpha}$. For a Gaussian distribution it is ...
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2answers
1k views

FX Option pricing on Forward vs. Spot

In a GBM world with riskless domestic and foreign interest rates, what would be the correct model for a FX plain vanilla option given the statement that this option is priced on the forward? I guess ...
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2answers
624 views

Mark Joshi, Quant Interview Question problem 2.34; replicating a digital option on a 4-step symmetric binomial tree

Question: Team $A$ and team $B$, in a series of $7$ games, whoever wins $4$ games first wins. You want to bet $100$ that your team wins the series, in which case you receive $200$, or $0$ if they ...
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2answers
761 views

Legitimate input parameters for Nelson Siegel Svensson model

I had previously asked this question and have come to better understand the answer with regards to setting the input parameters for the Non-Linear Optimization problem that provides the NSS parameters....
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1answer
71 views

How to calculate Chande Momentum Oscillator for FX

I am trying to calculate a momentum oscillator for the EUR/USD pair and am confused. A formula I read referenced the sum of previous up days. What is a "day" considered in Forex?
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1answer
942 views

Getting the next price of a GBM (Geometric Brownian Motion)

I am writing a program that creates realizations of a GBM. Starting from an initial price, I get the following price with this formula: ...
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1answer
175 views

FX Option Pricing Under Basis Adjustment

Given money market rates such as USD LIBOR and EURIBOR and in the context of FX options valuation, I have been reading about the importance to include a so called basis adjustment to one of the ...
0
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1answer
98 views

Bond asset class long term assumptions [closed]

How are long term capital market expectations set in the industry? I'm looking to get some pointers about setting long term assumptions for fixed income asset classes like global high yield credit, ...
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1answer
84 views

What do I call the combination of two or more prices when doing arbitrage?

Suppose that I’m doing forex arbitrage between multiple currencies. A possible arbitrage strategy is to combine the currency prices in pairs and then evaluate if there is a chance to make a profit. ...
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1answer
655 views

Can I do a GARCH model to forecast a time series?

I read this paper https://research.aston.ac.uk/portal/files/240393/AURA_2_unmarked_Energy_demand_and_price_forecasting_using_wavelet_transform_and_adaptive_forecasting_models.pdf the two authors ...
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2answers
464 views

How is the price of a bond actually determined?

How the price of a bond is actually determined? Is it the supply-demand that determines the price first and then the YTM is calculated on the back of this for that bond. Or is it that the changes to ...
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1answer
1k views

PCA on term structure of interest rates

Interest rate time series seems to be non-stationary whenever test is performed But covariance or correlation matrix is derived from term structure time series which are non stationary and later PCA ...
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1answer
65 views

Why does a higher stock value imply a higher call option value [closed]

This may seem like a very dumb question, but if the underlying stock price is greater, then why should a call option be worth more. My reasoning is that, if the option price is not affected by the ...
0
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1answer
2k views

Given $S$ is a Geometric Brownian Motion, how to show that $S^n$ is also a Geometric Brownian Motion?

Suppose that a stock price $S$ follows Geometric Brownian Motion with expected return $\mu$ and volatility $\sigma:$ $$dS = \mu S dt +\sigma S dz$$ How to find out the process followed by variable $...
0
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1answer
138 views

Market, Limit and Cancellation orders

From the paper https://web.stanford.edu/class/msande448/2017/Final/Reports/gr4.pdf page 8, I need at least the limit and market order. I can easily find the full depth from dxfeed or algoseek, but I ...
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2answers
2k views

30360 Daycount Count Convention to find NPV for Bonds

Using a 30/360 day count convention, how can you value the NPV of these cash flows and the discount factor? I know how to discount cash flows but how does it differ using a 30/360 approach? What is ...
0
votes
1answer
2k views

Bloomberg terminal swap zero curve calculation

I would like to ask about swap zero curve calculation algorithm by Bloomberg terminal. This is a plain vanilla CZK interest rate swap, fixing the Prague IBOR. My task is to calculate zero rates from ...
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1answer
33 views

Is the assignment of exercised options “truly” random

Everyone seems to say that assignment of exercised options is random; does it just appear random to an outside viewer or does the exchange pick a name from hat for assignment?
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1answer
163 views

Log Differences vs Percentage returns [closed]

When working with a single TimeSeries of Foreign Exchange price data (EUR/USD : OHLC) on a minute by minute level, is it better to use the % difference of the close vs the lognormal difference of the ...
0
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1answer
862 views

QL-Python Bootstrapping Yield Curve FuturesRateHelper throwing off results

I'm trying to perform a bootstrap of a yield curve from deposit rates, futures, and swaps, and the interpolation is "blowing up" for the futures maturities being off by two orders of magnitude (100x). ...
0
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1answer
242 views

Finding historical data for indices [duplicate]

Where can I find historical data for option prices on a given index ? Ideally I'd like to find for a period of several months 1) historical prices on options on a given index 2) historical prices on ...
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2answers
736 views

Two-period binomial model with dividends

Consider a two-period binomial model for a risky asset with each period equal to a year and take $S_0 = 1$, $u = 1.15$ and $l = 0.95$. The interest rate is $R = .05$. a.) If the asset pays 10% of its ...
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1answer
151 views

Possible to use diffusion equation(s) to price derivatives with non-zero boundary conditions?

One of the reason the Black-Scholes can be transformed into the heat equation is that calls and puts have a zero boundary condition on their contingent payoffs. Define the terminal payoff condition ...
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2answers
146 views

Calculating units in a cross currency short trade

If I have a forex account with a broker and a balance of 100 USD, and I'd like to short EUR/JPY, how many units can I short? How is this calculated? Which currency pair do I use to translate between ...
0
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0answers
460 views

How can I export intraday stock data into CSV from Interactive Broker or Yahoo Finance?

Google Finance API seems to be down forever. Are there instructions or manuals for downloading intraday stock data into CSV files from Interactive Broker OR Yahoo Finance?
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1answer
817 views

Interpretation of an option gamma larger than one

I am working on an option hedging simulation. In this context, I wanted to expand the simulation to include gamma. For testing purposes, I used among others the natural gas futures. When I calculate ...
0
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1answer
68 views

Compute the (Net) Present Value

Let's have a project where we invest 1000 at the beginning of year 1 and 1000 at the beginning of year 2. At the end of year 2 the income is 2200 and the project is closed. Person A discounted with ...
0
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1answer
139 views

Reference for why a derivative is a derivative and not say an insurance contract

I recently spoke to an options trader that tried to demonstrate option pricing by considering a random walk of balls dropping down a lattice so the underlying stochastic process is a simple random ...
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2answers
193 views

Questions on continuously compounded return vs long term expected return

I have reading a paper from Oliver Grandville on long term expected return. I am trying to reconcile what I am reading in that paper vs what I see under "Application to Stock Market" in Kelly ...
0
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1answer
319 views

Private Equity: Direct Alpha vs Excess IRR

I'm trying to understand the advantages and disadvantages of using Direct Alpha versus Excess IRR for computing excess returns over a market index for private assets. Wikipedia references a highly ...

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