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3 views

Should U and D change with the number of steps in a Binomial Tree?

In everyone's binomial trees online I see constant U and D. Even when I read Option Volatility and Pricing by Natenburg, all his diagrams use a constant U and D (where U is the upwards magnitude from ...
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0answers
2 views

Payment Gateways' market risk: where does it come from?

Companies like Square and Adyen and Paypal are flourishing. They facilitate payments between people and business in various currencies and provide small loans. However as they are not banks they are ...
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0answers
7 views

Hedging with implied volatility

I am reading this article by R. Ahmad and P. Wilmott: Which Free Lunch Would You Like Today, Sir?: Delta Hedging, Volatility Arbitrage and Optimal Portfolios Let $V^{i}$ the market value of an ...
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0answers
9 views

Can value at risk be computed using downside deviation?

Value at risk is usually computed with a regular standard deviation. But can it be computed using downside deviation (semi-deviation) instead? Particularly if I want to consider a Var that includes ...
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0answers
9 views

Basic arbitrage exercise

In the exercise we are given, possible contracts to buy/sell and possibility to take credits / make deposits money with current market rates. We are asked if its possible to make profit at time T=0 ...
0
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1answer
21 views

Numerical simulation of Bates model (Monte Carlo)

I'm trying to build Bates model in Python! $$dS_{t} = \mu S_{t} dt + \sqrt{V_{t}}S_{t}dW_{t}^{1} + J_{t}dQ_{t}$$ $$dV_{t} = \kappa(\theta - V{t})dt + \eta \sqrt{V_{t}}dW_{t}^{2}$$ $$dW_{t}^{1}dW_{t}^{...
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0answers
10 views

What is the correct way of calculating the Expected Exposure of a single FX Forward in this case?

We are given the following information: Counterparty Y sold Bank X a 5-year EUR/USD Forward at 1.05 with a notional of EUR100mil one year ago. Current EUR/USD spot rate trades at 1.10. Remaining time ...
0
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1answer
15 views

probability of interest rate hike using 30 and 60 day rates

How can I calculate the probability of a rate hike of 25 bps if 30 day rate is 3% and 60 day rate is 3.1%? I thought I need the implied fed funds rate but it's not given. Thanks!
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2answers
20 views

What does BOP: CP: SA mean?

If I look at this time series from the Office for National Statistics, the title reads Total Trade (TT): WW: Imports: BOP: CP: SA I can't find any kind of explanation for these acronyms. I think I ...
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0answers
20 views

TIPS Asset swap P&L [closed]

I would like create a spreadsheet to calculate the P&L of a TIPS asset swap but i don't have any idea how to do it, anyone could help me on this ? Thanks a lot
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0answers
12 views

Python Quantlib : How to deal with RuntimeError 'addFixing(date, value)'

for t_ccy in rate_dates.keys(): libor_base = ql.AUDLibor(ql.Period(3,ql.Months),ql.YieldTermStructureHandle(term_structure[t_ccy])) libor_up = ql.AUDLibor(ql.Period(3,ql.Months),ql....
1
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0answers
35 views

Understanding Ornstein Uhlenbeck Parameters

I am trying to fit an O-U process to a discrete time series (log prices). I am calculating the reversion rate and the mean level from coefficient of the linear regression between the log prices and ...
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0answers
28 views

algorithm for identifying bad NBBO timestamps

Hi: Suppose I had one minute NBBO data for about 4,000 equities and 3 years worth of days. So, each stock has about 700 or so days of data and each day has the minute by minute bid price and ask price ...
0
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0answers
27 views

Capital Adequacy Ratio Basel 3

Wanted to understand how Basel arrived at the figure of 8% for capital adequacy . Is it fair to say that if banks maintain CAR, then even if their loan portfolio goes bad, they have enough capital to ...
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0answers
23 views

Free resource to pull historical market cap data in Python? [duplicate]

I am trying to replicate the Russell 1000 with the top 25 stocks using a capitalization weighted method. I can pull historical price data from pandas(yahoo or quandl) with no problems. I need to pull ...
0
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1answer
46 views

Volatility time weights calculation

I. Clark introduces the concept of volatility time in Foreign Exchange Option Pricing under which the implied volatility should be interpolated in time with the formula below: where w is a weight ...
0
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1answer
33 views

Boundary for European Put Option

As an entry level financial engineer, I'm learning about call-put parity, which helps us to get the boundary for call option: $S-Ke^{-rT}<=c<=S$, what about put option? should its upper bound be ...
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0answers
21 views

What if all the weights are negative in mean-variance optimization during a crisis?

Usually the constraint is that all weights sum up to 1. But in a crisis when all assets are falling in prices, intuitively, all the weights should be negative in the optimization. But it contradicts ...
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0answers
23 views

Binomial Random Walk Motion

I am looking at the following binomial random walk: Let $S(t)$ be the underlying price at time $t$, and we assume that at the next time step, the possible options for $S(t+\delta t)$ are $uS$ with ...
1
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0answers
77 views

Risk-neutral price of $H=e^{X_T^1+X_T^3}$

Let $B=(B_t^1,B_t^2,B_t^3)$ a $\mathbb R^3$-valued Brownian motion. Let $r_t$ (risk free rate) be bounded and deterministic. Let consider the DISCOUNTED market $$d\overline X_t^1=\frac52dt+2dB_t^1-...
0
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1answer
67 views

Computing implied volatilities of ITM and OTM options

For an ATM call the implied volatility can be computed by using the Newton-Raphson method: ...
0
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0answers
47 views

Random Forest on financial time-serie?

Is it okay to apply Random Forest to a non-stationary financial serie? Or would it be correct to first difference the serie and then apply Random Forest to the new serie?
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0answers
42 views

Is optimising for the Final Wealth is the same as optimising log of growth rate in Kelly Criterion?

A direct, brute force approach could be used to find the Optimal Portfolio. Consider simple play. There's a biased coin with 55% probability of win. The simulator play as a single person with 100$ ...
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0answers
46 views

Reverse REPO. Exposure [closed]

How to determine a current exposure if I have a reverse REPO? https://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/repo-and-collateral-markets/legal-documentation/global-master-repurchase-...
-1
votes
1answer
48 views

project curve spot risk (PV01) into forward risk (PV01)

is there a (simplistic?) formula to convert spot risk PV01 into the forward risk PV01? For example, if I have a a) PV01 spot risk : 1yr = 100k/bp, 2yr = 50k/bp, 3yr = 25k/bp b) how can I project ...
1
vote
1answer
59 views

Arbitrage when discounting and forward computation is done with different curves

I notice that (equity derivatives) trades generally are priced with different forward curve and discounting curve, which clearly lead to arbitrage. Is this arbitrage value too small to be ignored? How ...
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0answers
40 views

Calculating front month VIX future returns

I'm currently reading a paper* which deals with seperating the volatility of volatility index (VVIX) into a physical measure of volatility of volatility (RVVIX) and a risk premium of v.o.v (VVRP). To ...
0
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0answers
38 views

Avellaneda Stoikov: How to arrive at the formula with infinite horizon?

I am reading a paper High-frequency trading in a limit order book by Avellaneda and Stoikov. I cannot verify the reservation prices given in section [2.3]. Do you know how to arrive? Thanks!
0
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1answer
57 views

Is it possible to use options to increase the yield of a dividend paying stock?

I was wondering if it is possible to use call options (selling call options) to increase the yield of a dividend-paying stock (that I already own) by 1-2 percent per year? What are the cons of this ...
1
vote
1answer
64 views

Why do we perform change of variable for Black Scholes equation

As an entry level financial engineer, I'm studying the Black Scholes equation, which looks like follows: $${\frac {\partial V}{\partial t}}+{\frac {1}{2}}\sigma ^{2}S^{2}{\frac {\partial ^{2}V}{\...
2
votes
1answer
80 views

Using Implied Volatility for Portfolio Optimization

Hello I am interested in portfolio optimization . Previously I when I have done portfolio optimization I would take the historical returns of a stock and use them to perform a mean variance ...
1
vote
1answer
33 views

Forecasting Volatility using GARCH in Python - Arch Package

Disclaimer: Posted this on stackoverflow, but maybe here should be the right place to ask something about GARCH I'm testing ARCH package to forecast the Variance (Standard Deviation) of two series ...
0
votes
1answer
46 views

Market makers order execution on the order book

If a market maker is required to always have at least one order on a certain side of the order book (buy or sell), if there's no one else in the market and just market makers left on the book, will ...
0
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0answers
44 views

Simulation of Heston process Quantlib-Python

I am wondering weather there exists some method such that one can simulate sample paths for the Heston model in Quantlib-Python. I am currently working on a project that require simulations with the ...
2
votes
1answer
65 views

Is there an issue with estimating future returns from autocorrelated returns?

I have a time series $X_t$ generated from a standard GBM $$dS_t = \mu S_t dt + \sigma S_t dW_t$$ If I take the log returns over a rolling window of length $l$ $$r^{(l)}_i = \log \left( \frac{S_i}{...
2
votes
1answer
83 views

Process with negative quadratic variation

Today seems to be question day for me, sorry. The complex process $$ dX = i\sigma dW $$ where $i = \sqrt{-1}$ and $dW$ is a standard (real-valued) Brownian motion will have a negative variance ...
1
vote
1answer
44 views

How do 409a's and market caps compare?

I've found that MarketCap is a quick and decent way to evaluate a public company. For private companies, the best I've found is a 409a. It seems like, in many scenarios, both evaluation methods ...
2
votes
1answer
68 views

Backtest overfitting - in-sample vs out-of-sample

Recently, I read a great paper by De Prado et al. on backtest overfitting problem in Quantitative Finance titled Pseudo-Mathematics and Financial Charlatanism: the Effects of Backtest Overfitting on ...
1
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0answers
32 views

How to find the volatility indices corresponding to equity indices?

I have a list of equity indices that I got through Eikon API (with Python). I successfully got their time series but at this point I would need the corresponding implied volatility, which is not ...
3
votes
2answers
107 views

Margrabe option: change of numeraire versus conditioning and numerical integration

I am having a slight brain meltdown because I do not seem to be able to understand the following basic thing. Consider a BS economy, and two assets $X$ and $Y$ $$ dX = \sigma X dW $$ $$ dY = \nu Y dZ ...
0
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0answers
23 views

What is the appropriate breakpoints for portfolio sorting (using CRSP stocks) based on size?

I want to sort stocks based on size. I use CRSP database from 1962 to 2018. My question is that in order to create quintiles, what is the appropriate breakpoints? and how can I calculate them? I saw ...
0
votes
1answer
62 views

Forward Contract Price on Zero Coupon Bond

I'm trying to calculate the forward contract on a zero coupon bond where the forward contract matures at t=4. The zero coupon bond matures at t=10 and has a face value of 100. The price of that bond ...
0
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1answer
53 views

Where can I find data about Options for Europe (entire dataset)?

I need to get data about the entire dataset (i.e. all) of options for European countries. Where can I do that? For example, if I had to do it for US options, I would just use WRDS (to which I have ...
1
vote
1answer
62 views

Benchmark of a Dollar Neutral Strategy

A dollar neutral strategy invests the same amount of money long and short without accounting for the volatility (risk) of either side. Depending on volatility you either end up positively or ...
1
vote
1answer
89 views

Intuition for consistent Derivative Prices under different Numeraires and Measures

This is essentially the Fundamental Theorem, however I am not asking for a thorough proof, I am more interested in the general intuition. In words, it makes sense that whatever your unit of account (...
0
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0answers
11 views

GoogleFinance often returns #N/A and internal error messages while getting stock quotes [migrated]

Anyone know workarounds to make GoogleFinance actually work? It works for a while so it is not a problem with my formulas but then periodically the cells that were showing stock quotes suddenly show "...
2
votes
1answer
105 views

Steven Shreve: Stochastic Calculus and Finance

The lecture notes have the following theorem: Let $\theta\in \mathbb{R}$ be given and $B(t)$ stands for the Brownian motion which is a martingale, then $Z(t)=exp\{-\theta B(t)-\dfrac{1}{2}\theta^2t\}$...
0
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0answers
25 views

Hedging Strategy for European Call Option (Single period Binomial Model)

I am hoping to gain some insight to an exercise from my undergraduate Mathematics of Finance class. (This is my first course ever in finance, so bear with me.) The exercise is: Consider a single ...
0
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0answers
36 views

How can I approximate Dollar Bars from Minute Data instead of Tick Data?

Having been influenced by de Prado's Advances in Machine learning book, I've set out to build the dollar bars (in which each bar represents a set dollar amount of transactions in the security) that he ...
0
votes
1answer
50 views

Fixes of quadratic utility when probability of decreasing utility is large

In finance and specifically portfolio theory, a popular utility function is quadratic utility $$ u(x)=x-\frac{\lambda}{2}(x-\mu_X)^2 $$ where $x$ is wealth and $\lambda$ is the parameter of risk ...

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