New answers tagged option-pricing
0
votes
Interpolating option surface while respecting no-arbitrage conditions
I am interested in the same topic.
Often you have some kind of stochastic model which you calibrate to fit the option data as closely as possible and then calculate the implied volatility surface ...
- 731
0
votes
Options market making process (step-by-step)
Thanks for the question and complete answer you two provided. I have some simple questions because they made it hard for me to understand the text compeletely.
first of all, what do you mean by "...
0
votes
Interpolating option surface while respecting no-arbitrage conditions
Once you normalise properly to remove drift effects and dividends, you will need a convex-decreasing in space and increasing in time interpolation.
(basically do in moneyness (to fwd) and not absolute ...
- 11
0
votes
Price a forward contract on a zero-coupon bond
A simple way is to think about what this forward contract will allow you to do.
Note that the 'forward price' of the asset refers to the price you must pay to purchase the $t_2$-bond at $t_1$, and let ...
0
votes
Pricing an option on the spread of two contracts, what correlation parameter?
The third way (continuing the previous answer) is to get some market or consensus prices of the option on the futures price spread (or prices of basket options, if available) and, given implied vols, ...
- 5,123
1
vote
Accepted
FX Binary Option and differences in prices based on different numeraires?
I've read through the pages where he discusses this a few times. I think the key is this, although I am not 100% sure if I am interpreting his phrases correctly.
(Note: All options/payoffs I'm ...
- 704
2
votes
Accepted
Numeraire flipping and currency FX options
Looking at the example above after the edits. The short answer is you need to multiply by $K$ as well as the FX rate.
For the longer answer:
Lets let $D^e, D^u$ be the discount processes in the ...
- 704
0
votes
Accepted
Pricing Options on Bloomberg
1 share is $100 face. The FVZ4 contract nominal is 100k, therefore that is 1k "shares". For 14,020 contracts you would buy 14,020,000 "shares".
The easy way to check this is - to ...
- 643
0
votes
What is implied volatility relationship with time?
It is well known that the value of At the money options is proportional to $\sigma\sqrt{T-t}$ where $\sigma$ is the implied annualized volatility. So as time evolves, the value falls naturally due to ...
- 17.5k
0
votes
Selecting volatility for stress scenario
Not a stress testing expert, but from my own (empirical) research about how the volatility skew changes across time - you'd be surprised how insignificant the change in convexity of the volatility ...
- 1,670
2
votes
Accepted
Use of Non-Risk-Neutral Measure for Pricing Derivatives
After more research and considering Kurt's comment, I believe I have found a reasonable explanation for why it is appropriate to use the measure $\mathbb{Q}_1$ to price derivatives. First, since we ...
- 41
1
vote
path dependency and dollar gamma
What you have in your portfolio is an incorrectly valued instrument. It is misleading to say it is an option, because the option that we understand is that which is priced correctly. When the PnL ...
- 2,521
0
votes
When to expect profitability of a call options buying strategy
https://tradeoptionswithme.com/options-probabilities-explained/
super old post, but figured if someone else is looking it might help.
This link might be a decent place to get you started. The greeks ...
Top 50 recent answers are included