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6 votes
Accepted

How does a stock becoming hard to borrow affect puts and calls?

As you described, buying a put and selling a call in the hard to borrow stock, you have created a synthetic short future. Like other equity finance positions, the "difficulty to borrow the stock&...
AlRacoon's user avatar
  • 6,632
4 votes

Forward price confusion

Less quantitative answer: Suppose I want to enter into a contract to buy corn in 6 months. The seller will look at the current price of corn, among other factors, and make an offer for which they are ...
D Stanley's user avatar
  • 1,441
4 votes

Forward price confusion

Note that forwards can behave differently in different markets; let's assume we're talking about an equity market and specifically on some stock $S(t)$ paying a continuous dividend of $q$. Also, let's ...
Rylan's user avatar
  • 605
4 votes

Is the Forward Price of a bond subject to the Pull to Par?

No the forward price of a bond on a fixed date does not pull to par. If the forward yield stays the same, so does the forward price. In a scenario where yields don’t move , it is the spot price that ...
dm63's user avatar
  • 17.2k
3 votes

Substituting the basis swap for the FX forward

It is best to understand this from basic principles. I will construct these instruments in Python's rateslib so that you can also visualise the cashflows and the ...
Attack68's user avatar
  • 10.5k
2 votes

Why does cost of borrow have anything to do with the equity forward price?

If you have an asset you can generally fund it cheaper via repo than you could via an uncollateralized loan; that decreases the cost and thus the forward price.
river_rat's user avatar
  • 1,040
2 votes

Deriving central bank hikes/cuts from a swap curve

Compute the swap rate from 1 cb date to the next, to imply the effective rate (you may need to add subtract a spread I.e. in USD, interbank swaps are traded versus SOFR or FF, if you use SoFR, ...
user68819's user avatar
  • 495
2 votes

Forward Rate Volatility Calculation - Caps

What you are asking for is called volatility stripping. A cap is a series of consecutive caplets which are call options on forward rates. Caplets are not traded individually on the market so there are ...
Hasek's user avatar
  • 814
2 votes

Implied Distributions from forward prices

You are right: the forward has no information about the future (market inferred) price distribution. In fact, under the risk-free measure, it is just the undiscounted expectation of the price, taking ...
KT8's user avatar
  • 855
1 vote

Convenience yield intuition on consumption assets?

You mention Cost of Carry and Convenience Yield as if they are similar. Actually Cost of Carry and Convenience Yield work in opposite directions. CoC makes the holding of a physical commodity less ...
nbbo2's user avatar
  • 11.4k
1 vote
Accepted

Connection between the $\sigma$ parameters of the spot price and the forward price

They are not contradictory, if we choose sigmas reasonably (time-dependent, as suggested in the comments). If $$ F_t^T = e^{r(T-t)} S_t \; \; {\rm and} \; \; dS_t = rS_tdt + \sigma_t S_t dW_t, $$ with ...
ir7's user avatar
  • 5,043
1 vote
Accepted

Present value of an FX Forward contract at each simulation and time point node of a Monte Carlo simulation

An answer has already been provided in this discussion: How to price the FX forward contract under stochastic interest rates? Here is a summary of the (backward) derivation of equation (1): $$ V_{t} = ...
Whitebeard13's user avatar
1 vote

How do we price a Non-USD currency FX Forward pair by using cross-currency basis for each currency?

This is just an extension of @Dimitri 's answer but with numbers to eluciate the concept. when pricing a GBPUSD FX-Forward we build the USD SOFR curve through which we get USD risk-free rate. For the ...
Attack68's user avatar
  • 10.5k
1 vote

How do we price a Non-USD currency FX Forward pair by using cross-currency basis for each currency?

If your accounting is in ccy$_0$, such as USD or EUR, then you discount the ccy$_1$ leg of the ccy$_1$-ccy$_2$ forward with ccy$_1$ rfr + ccy$_1$-ccy$_0$ cross-currency basis spread and likewise ...
Dimitri Vulis's user avatar
1 vote

Why does cost of borrow have anything to do with the equity forward price?

In finance just in general, you always assume you have 0 on day 1. So if I want to replicate a long fwd equity: I am hypothetically saving me borrowing $x and paying an interest rate (where I ...
user68819's user avatar
  • 495
1 vote

swap carry/rolldown mid-period

Swaps are derivatives not securities, and they do not have intrinsic cost-of-carry, in a pricing sense. They do not involve an outlay of cash to purchase so do not require funding. Another way to ...
Attack68's user avatar
  • 10.5k
1 vote

Value of a forward contract proof

The question is not self contained and hard to answer if one does not know that book. With the notation $S_t$ asset price, $K$ forward price, $T$ maturity, $r$ riskless rate and assuming zero ...
Kurt G.'s user avatar
  • 2,033
1 vote
Accepted

Hedge up-knock-in forward option

We note that $\{H_B \le T \} = \{ \underset{0 \leq t \leq T}{\max}S_t \ge B \}$ and $S_{H_B} = B$, then, it suffices to compute $$V:=\mathbb{E}((B-S_T)\cdot \mathbf{1}_{\{ \underset{0 \leq t \leq T}{\...
NN2's user avatar
  • 1,008
1 vote
Accepted

Why must the forward price be equal to the expected value for an underlying security

Strictly speaking the book is not accurate. The forward price is equal to the expected future price only in the risk- neutral world (usually denoted by the pricing measure $Q$). In the real world (...
dm63's user avatar
  • 17.2k

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