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Processes used in quant finance

Here is a short list (to be edited and improved - community wiki) : Standard brownian motion (also called Wiener process) for which: $d\, W_t \sim \mathcal N(0, \sqrt{d t})$ Geometric brownian ...
11 votes

Is this how stock trading works?

In January 2020, Matteo Aquilina, Eric Budish, and Peter O’Neill from Britain's Financial Conduct Authority published this study, illustrating how "low latency" market participants can make ...
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FX forward with stochastic interest rates pricing

The formula $F^X(t,T) = E_t^d\left(X_T \right)$, under the domestic risk-neutral measure, is problematic. Note that, at time $t$, the forward exchange rate $F^X(t,T)$, for maturity $T$, is the ...
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8 votes
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Why do FX Swaps have Interest Rate Risk?

An FX Swap can be described as "borrowing in one currency and lending in another". When put this way it is clear that it has something to do with interest rates in the two currencies. You will be very ...
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8 votes
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Pricing of a Foreign Exchange Vanilla Option

Be careful of your rate conventions! The issue here is that all your rates are expected to be in units of domestic vs 1 unit of foreign. So for example USDCAD is 1.3347, you really need to be using 1/...
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8 votes

When to Choose FX Swap or Forward

An FX swap exposes the user to a risk that is intrinsic to the interest rate differentials and supply and demand factors of one currency relative to another, but fundamentally there is negligible ...
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8 votes
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Spot/Next and Tom/Next FX forward swaps

Let’s say the settlement period is T+2, and you made a deal on the 8/10/2018. The spot date would be 10/10/2018 (assuming no holidays!), that’s when the physical exchange would happen. Now if you don’...
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8 votes

Is this how stock trading works?

You would definitely have some advantage. High Frequency Trading is all about speed and the fastest traders wins. Oftentimes, winner takes all. The blog Sniper in Mahwah & friends digs into the ...
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8 votes
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Inflation effect on FX rates

Edit: adding some references (main body is untouched) Kenneth Rogoff and Richard Meese received an incredulous reaction to their now-famous paper showing that random-walk (RW) forecasts outperform ...
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8 votes
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Dynamics of FX rate

I am answering now instead of commenting. The rate of change in FX is naturally forward looking in this case. What you confuse is what happened to Spot due to changes in interest rate environments ...
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7 votes

How do I get a good mid-price?

Ask minus bid has nothing to do with the mid price - it is the spread. Generally you see a collection of bid/offer orders resting on different price levels. In the simplest case, you just see one bid ...
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7 votes
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EUR/CHF fx rate drop on the 15th of January 2015

What happened was totally unexpected end of peg against the euro @ 1.2CHF regime that Swiss central bank aborted. See some articles about it. As far as I know nobody in the markets knew, there was no ...
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Understanding the GDAX price chart

The top chart is called a 'candle stick chart' or 'OHLC candlestick' or 'OHLC bar chart' http://multicharts.com/trading-charts When the price goes down during a time interval (from O to C) the box is ...
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  • 9,462
7 votes

Where can someone get free (or very cheap) high frequency tick forex data?

Dukascopy offers historical tick data. Through their historical data website you can download what you want, but registration is required, and lots of manual clicking. However if you are comfortable ...
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6 votes
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Black model: Delta - strike relationship regardless of expiry?

The time to expiry is required, but it's included in the inputs: the two discounts $e^{-rT}$ and $e^{-qT}$ and the standard deviation $\sigma\sqrt{T}$. You might argue it could be documented more ...
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CNY Devaluation: Why EUR up, USD down?

Today (1 day after the fact) the following headline appeared in the Financial Times: "September Fed rate lift-off put in doubt, Fallout from China’s currency move turns market mood". If true, this ...
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6 votes
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Pricing foreign currency bonds - which approach is more theoretically "sound"?

In #2, you can use FX forwards to convert your JPY cashflows to USD but it is more common in practice to use a cross-currency swap for this purpose. Indeed, the advantage of the latter is that it ...
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6 votes
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FX Option with Different Premium Currency

Let $X_t^{gbp\rightarrow usd}$ and $X_t^{chf\rightarrow usd}$ be the respective exchanges rates from one unit of GBP and CHF to units of USD. Depending on the option contractual specification, the ...
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6 votes

Pricing of a Foreign Exchange Vanilla Option

The answer given is mostly wrong: @msitt uses a convoluted way without explicitly mentioning it (put-call symmetry) to actually give the price of a USD Put, not of a USD Call as requested. Here is a ...
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6 votes
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Does Yahoo/Google no longer support web-scraping of FOREX data?

Yahoo has changed their site structure. The new download URLs look like this: https://query1.finance.yahoo.com/v7/finance/download/MSFT?period1=1463461200&period2=1494910800&interval=1d&...
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6 votes
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Strike / delta relationship for FX options

In FX world, the ATM strike is the delta-neutral strike, that is, the absolute delta values of a call and the corresponding put are the same. Moreover, the delta can be premium adjusted or not ...
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6 votes
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What is the formula for calculating fair value of currency futures?

$$F = Spot \times e^{(\text{local interest rate} - \text{foreign interest rate}) \times T}$$ where $Spot$ = AUD per dollars. $T$ is the time to maturity of the contract (in years). So for example ...
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6 votes
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Group name for currencies, equities and other financial products

The most universal name that any "currency (pair)", "equities" or "futures" falls under is either a product or an instrument. In some ways I prefer product because you can have 2 exchanges allowing ...
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6 votes

Pricing an fx option in the same currency

Let $P^d$ and $P^f$ denote the respective USD and EUR risk-neutral measures. We assume that, under the USD risk-neutral measure, \begin{align*} dS_t = S_t \Big(\big(r^d-r^f \big)dt +\sigma dW_t \Big), ...
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6 votes

Relation between ATM, RR and BF

The ATM is an outright position (long 50 delta put and 50 delta call) so the main exposure is vega. It is the riskiest of the three, and demands a higher bid-offer spread from market makers to ...
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6 votes

FX option trading questions

Yes, in the sense that it is assumed that the delta will be passed between participants at time of execution. Not necessarily. A non delta neutral trade may be used for speculation , or for hedging.
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6 votes
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FX Forward rate agreement valuation in quantlib

You are not giving the constructor a discountCurve. The constructor is: ...
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6 votes
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what is the difference between an NDF and a FX Forward contract

Example of physical delivery FX forward: In 1 month (maturity date or settlement date), I pay you USD 1 milion and receive from you EUR 1.2 million. You can either specify both notionals in pay and ...
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6 votes
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Carry trade by trading FX Futures

You are correct. In order for this to be a pure fx carry trade with no market risk (just credit risk), you have to have 2 fx trades. One shorter dated and the other longer dated. Typically, you this ...
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5 votes
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Transaction Costs for Currency Pairs

You've got your calculation of the spread wrong, for what you're trying to do. Looking at the spot prices: SGD = USD 0.8, MXN = USD 0.077, NOK = USD 0.16. So in descending order they are SGD, NOK, ...
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