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1

As long as you are able to generate a joint terminal distribution, any model will do the job. Copula is only one such approach. Now, in theory, you cannot completely statically replicate this payoff in general. To see this, know that all you have is vanillas, and the most you can do is imply the marginal distribution from them (the usual risk neutral density)...


1

Great answer given by KeSchn above. I would like to add an additional perspective. My experience with and my understanding of the Risk Neutral measure is entirely based on "no arbitrage" and "replication / hedging" arguments. The way I would like to explain this view is via the following argument: (i) First, I want to build the intuition ...


13

Life Without a Risk-Neutral Measure How would we price assets without the measure $\mathbb Q$? Well, we would start with some version of the Euler equation $P_t=\mathbb{E}_t[M_{t+1}P_{t+1}]$, where $M$ is the stochastic discount factor (SDF). This equation holds under very weak assumptions (law of one price) and uses real-world probabilities. So, we take the ...


5

You are not giving the constructor a discountCurve. The constructor is: ql.ForwardRateAgreement(valueDate, maturityDate, position, strikeForward, notional, iborIndex, discountCurve=ql.YieldTermStructureHandle()) So you should add a the spotCurveHandle as the last parameter: fra = ql.ForwardRateAgreement(ql.Date(7, 5, 2018), ql.Date(15,12,2020), ql.Position....


4

You say: At this point I don't really get any further, as I am unsure about which "cross section" is being talked about here. Since I have created 25 portfolios, I can only have all in all 25 values in the cross section, right? Isn't that far too little for a sufficient regression? Or do I have to run new time series regressions for each company ...


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As @ilovevolatility explains, the seminal reference for this matter is Geman, El Karoui & Rochet (1995). We assume none of the assets are dividend paying, and they are strictly positive. There are two potential options. You are considering a market with only assets $X$ and $N$. Then Assumption 1 of their paper would apply, which is related to the two ...


4

To get the bond yield from the price: import QuantLib as ql maturity = ql.Date(30, 1, 2030) coupon = 0.03 issueDate = ql.Date(30, 1, 2019) frequency = ql.Semiannual dayCount = ql.Thirty360() price = 104.5 bond = ql.FixedRateBond(2, ql.TARGET(), 100.0, issueDate, maturity, ql.Period(frequency), [coupon], dayCount) yld = bond.bondYield(price, dayCount, ql....


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