8
votes
Pricing and hedging caps and floors on illiquid emerging markets
It could be worse. You're not asked to price rate exotics like accreters that might need more inputs besides implied vol cube :) and you're only asked to make markets. I.e., if I understand the ...
- 11.9k
5
votes
interest rate, dividend rate data for black scholes model
The experts on this issue are the people at the CBOE who compute the VIX volatility index. I suggest you use the same methodology described in this document Cboe Volatility Index Mathematics ...
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5
votes
interest rate, dividend rate data for black scholes model
The interest rate can be derived from put call parity. A number of questions about how to do this have been asked, for example this one but look at related questions as well.
For European options ...
- 8,438
5
votes
Questions on options cost of carry, and relationship to futures cost of carry
Both answers already address the gist of the question. I decided to add (quite) some details because I think there is some confusion from the OP. It is not the future that has carry costs or benefits ...
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5
votes
Questions on options cost of carry, and relationship to futures cost of carry
I think it's best if we go through the various terms that appear in your question and explain them one-by-one.
Derivative price: intuitively, a derivative price is what it costs to "create it&...
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5
votes
Accepted
Why is SONIO Index lower than UK Rates?
The current UK Base Rate is 3.50%, which is what UK banks earn on their deposits at the Bank of England. That rate is fixed by the BoE. Sonia on the other hand is determined by actual transactions in ...
- 16.5k
5
votes
Accepted
PV01: bumping all tenors along the curve or only a tenor at a time?
The linked ISDA document is ISDA Standard Initial Margin Model (SIMM) Methodology version 2.3. Here is version 2.5 https://www.isda.org/a/Pf2gE/ISDA-SIMM-v2.5.pdf , although 22 is unchanged.
Item 22 ...
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5
votes
Quantlib FRA and interpolated rate in Swaps vs BBG valuation
I don't know what are your Bloomberg setting for the CZK, but I'm pretty sure it has to do with interpolation method.
The slope between the two nodes for determining the forward you mention is ...
- 5,685
4
votes
Accepted
Difference between OIS and SOFR?
The Fed Funds Effective Rate is the overnight unsecured borrowing rate between financial institutions. It is published on Boomberg's FEDL01 page.
SOFR is an overnight interest rate which represents ...
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4
votes
Understanding how markets predict BoC's policy interest rate decisions
I trade interest rate derivatives. I can definitively tell you the best way of analysing what is priced in is to identify the liquid and tradeable instruments that most closely aligns with the central ...
- 9,195
4
votes
pricing in the case where payment currency and collateral currency are different?
TO answer the question in the comment. Suppose you have a USD cash flow receivable in 5yrs and you are trying to calculate the PV. You need to know the interest rate that you are paying on the EUR ...
- 16.5k
4
votes
What does EUR 5y2y-7y3y-10y5y mean?
You can have a look at the fly in nordea.
It's the same logic, just different tenors. If you google paying the belly you also find info. Essentially, by selling the short- and long-term (the wings) of ...
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3
votes
Accepted
What are the quantitative models for modelling the SOFR rate, the IR products when Libor rates end
The reference you want is https://www.newyorkfed.org/arrc
The conversion to SOFR from LIBOR was well worked and well publicised, concerning the transition issues and what were the ultimate ...
- 9,195
3
votes
Pricing and hedging caps and floors on illiquid emerging markets
Just add to Dimitri's excellent answer, particularly regarding hedging: In terms of development, rates vol markets in EM tend to lag FX vol markets. So chances are there is some FX options trading ...
- 1,231
3
votes
Value options when the currency’s risk free rate is negative?
Nothing new to @Matt Wolf's answer but a few more details. Although this question was something new at the time of writing, it is probably clear now that plugging negative interest rates into Equity / ...
- 8,143
3
votes
DI futures contract value on bloomberg
You're talking about the future Bloomberg calls 'ODA Comdty' (e.g. 'ODF21 Comdty'), and the BMF exchange calls DI1. It uses a non-linear contract multiplier. To convert from the quoted price to the ...
- 31
3
votes
Recommended books/resources for IRRBB risk metrics calculation
All the elements that you mentioned are not specific to IRRBB. It may be more efficient to ask about more focused questions.
For IRRBB in general, I suggest that you start with BCBS's Interest rate ...
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3
votes
How to calculate YTM in case coupon payments are reinvested at a different rate than the bond's coupon rate?
In my opinion it's a flawed argument because there is no reinvestment assumption in the ytm computation. Investopedia is not a reliable source generally.
It is a common fallacy to state the ...
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2
votes
1y10y vs. 10y1y Swaption
This is an old but nice question and already has a good answer. A quick way to think about it is using the old "trader's formula" for a (ATMF) swaption: $$c\equiv 0.4 \sigma\sqrt{t}\cdot ...
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2
votes
Cap/Floor ATM Rate
The "exact same characteristics" part is important. The swap will never be exactly the standard swap. E.g. for EURIBOR 6M index it will be a swap with a 6M and ACT360 fix leg while the ...
- 51
2
votes
Accepted
Is this the correct discretisation of the Hull-White SDE for building a python model?
I am led to believe that your discretization is fine but uses too large of a step-size. This answer will tackle discretizing SDEs in general and then apply it to the Hull-White model.
The simplest and ...
- 225
2
votes
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Is there a way to use normal volatility in the Black–Scholes–Merton model to value interest rate caps?
This has actually been done widely in the industry since negative interest rates became a long-term feature of financial markets (JPY, EUR, CHF).
When your underlying is a Gaussian martingale, ...
- 2,570
2
votes
Why do exchanges apply a fixed interest rate as part of the funding rate for perpetual futures?
I have not seen much work on theoretical fundamental values of perpetual futures and how often the price deviates from them but there are some works on minimizing arbitrage gaps. While there might be ...
- 444
2
votes
Questions on options cost of carry, and relationship to futures cost of carry
Interest rates have an effect on options in two ways:
the forward: the higher the interest rates, the higher the forward. Thus with a higher forward, calls become more expensive and put the opposite.
...
- 190
2
votes
Quantlib: how to construct CDOR volatility cube? Getting error when using SwapRateHelper
Looking at the declaration of the constructor you're using (https://github.com/lballabio/QuantLib-SWIG/blob/master/SWIG/ratehelpers.i#L236) I see two reasons:
you're passing ...
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2
votes
Accepted
Can you actually earn the carry return in FX?
Practically, if you have access to the financial markets, you can earn that interest.
On day one, you sell your domestic currency denoted $X_d$ (where the 3m prevailing rates are 2%) and you buy the ...
- 5,998
2
votes
Quantifying the impact of rates change on bond prices
It depends on your bonds, and on the kind of risk scenarios you want to consider, and how you intend you use these numbers.
As Jan Stuller points out in his excellent answer, modified duration is ...
- 11.9k
2
votes
Accepted
Quantifying the impact of rates change on bond prices
Let's think of the bond as a set of fixed cash-flows (which it is, unless it's a floating-rate bond). These cashflows consist of the coupons and the face-value paid at maturity.
Unless the coupons are ...
- 5,998
2
votes
Rationale for issuing zero coupon bonds
The rationale is that the bond issuer gets capital upfront with no periodic payment required. So depending on the use of the proceeds, it may be more beneficial to receive a lower amount upfront in ...
- 1,301
2
votes
Accepted
Rationale for issuing zero coupon bonds
The stripping does not affect the present value (to a first approximation), if the firm issued a 1 million coupon bond, and it was stripped, the value received from selling the coupon-strip plus the ...
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