8 votes
Accepted

What is a Constant Maturity Swap (CMS) rate?

A constant maturity swap (CMS) rate for a given tenor is referenced as a point on the Swap curve. A swap curve itself is a term structure wherein every point on the curve is the effective par swap ...
compilation-error's user avatar
7 votes

Intuition behind calendar spread max loss

This is not necessarily true. Take a high dividend paying stock (10%) for example. If deep ITM, you would have a loss higher than the initial cost for european options, or face an early exercise for ...
AKdemy's user avatar
  • 8,739
7 votes

What is a Constant Maturity Swap (CMS) rate?

In simple terms: An ordinary swap might be a 10 year swap of Libor vs a fixed rate; this fixed rate is determined in the marketplace every day and is published by Reuters, Bloomberg etc. as the '10 ...
Alex C's user avatar
  • 9,372
6 votes

What is a Constant Maturity Swap (CMS) rate?

In a vanilla swap, the IR on the floating leg usually depends on the reset period/swap frequency. If frequency is 6m, 6m LIBOR is used for reset, 3m LIBOR for quarterly resets etc. In a floating CMS ...
quant360's user avatar
4 votes

Using a call-spread to hedge a digital option

There are a few extra things to consider here where you'll get a different answer if you ask a quant or a trader. If we have a european digital that pays \$1 if the underlying is above 120 ($S_0 = ...
will's user avatar
  • 2,571
4 votes
Accepted

Construction of Butterfly Spread as sum of Call Options

If you're reconstructing a payoff as a linear sum of call options, then the procedure is quite simple -> since the payoff of a call is zero up to the strike, and then linear, you start on the left (i....
will's user avatar
  • 2,571
4 votes

Vertical Spreads : Long/Bull Call vs. and Short/Bull Put?

Here's a simple retail answer that doesn't involve an option pricing model or a bunch or theory. With vertical spreads: If it's a credit spread, the maximum gain is the credit received and the ...
Bob Baerker's user avatar
3 votes

Intuition behind calendar spread max loss

Based on the clarification in the comments, I would give the following reasoning: If the stock price moves far away from the strike in either direction, then the maturity of the call option matters ...
Hans-Peter Schrei's user avatar
3 votes
Accepted

Boundaries for Call Spread

If $S_T<K_1$, the payoff is zero, and we have $\frac{(K_2-K_1)S(T)}{K_2} \geq0$ If $K_1 \leq S_T<K_2$, the payoff is $(S_T -K_1)$. We have $$K_1K_2 \geq S_TK_1$$ and $$S_TK_2+K_1K_2 \geq ...
Canardini's user avatar
  • 553
2 votes

Valuating Prepayment on Loans- Which models are favorable?

I've been analysing the same problem and i think that the way to go it's calibrating an interest rate model. Think of it as an option on a bond, there is plenty of literature about that. Also you can ...
Jose Pedro Melo's user avatar
2 votes

What is a Constant Maturity Swap (CMS) rate?

The other answers explain the structure but they do not appear to address your follow up questions in the comments regarding the naming of a constant maturity swap (CMS). While it is true that the ...
RiskNeutral's user avatar
2 votes

Calendar spread: What are the worst cases?

You should specify the underlying product. I can think of seasonal commodities where an options calendar spread would effectively be on underlyings that are very different. In that case, "What ...
user42108's user avatar
  • 2,252
2 votes
Accepted

Variance of a spread for options on spreads

I think the variance of the instantaneous shifts in the spread is meant: $V \left[ dX \right]=V \left[ dS_1-dS_2 \right]$ And the individual variances (in the conditional and local sense) are: $...
Magic is in the chain's user avatar
2 votes

What is CMS Spread Option Single Look? In what ways is it different from CMS Spread Cap/floor?

A single look CMS spread option is simply an option on the difference between the two forward CMS rates and a chosen strike $K$ on a single expiry date $t$. A CMS spread cap is then a strip of options ...
oronimbus's user avatar
  • 1,896
2 votes
Accepted

Margrabe option: change of numeraire versus conditioning and numerical integration

Might you be using the tower law in a wrong way? I have the impression you derive your second equation by conditioning by the $\sigma$-algebra generated by $(Y_t)_{t\geq0}$, however note that: $$\...
Daneel Olivaw's user avatar
2 votes

How skew in vertical put spreads change the payoff?

Well, the probabilities implied by the market are not equal. If you believe they should be equal, then go ahead and express yourself in the market. The point is , it is not an objective fact that ...
dm63's user avatar
  • 17k
2 votes

Should I hedge this spread with a spread option or an insurance product?

I know this is perhaps the type of answer you seek, but there are alternative hedging products such as PPAs which could help with this. PPAs can be structured in many ways to allow for parties ...
Daniel Wahlström's user avatar
2 votes
Accepted

Should I hedge this spread with a spread option or an insurance product?

In my experience this is not easily hedgeable. Expected volume can be hedged using baseload futures, or, if you are in a very liquid market (Germany) a combination of baseload and peak. You will still ...
Juan Ignacio Gil's user avatar
2 votes

Can't losses from Long Puts always be reduced, by turning them into Put Credit Spreads?

By selling that additional Put, you're not only collecting the credit, but you're also introducing more risk. In essence, that's the reason the other party pays you for handing them the Put option. I ...
AllBlooming's user avatar
2 votes
Accepted

Change of numéraire for two risky assets without bank account (Margrabe‚Äôs formula?)

Under the risk-neutral measure both stocks follow the GBMs \begin{align} S^{(i)}_t=S^{(i)}_0\exp\left((r-q_i)t+\sigma_iW^{(i)}_t-\frac{\sigma_i^2t}{2}\right)\,,\quad i=1,2\,, \end{align} where the ...
Kurt G.'s user avatar
  • 2,023
2 votes

Pricing European Call Closed Form Spread Options in Python

Firstly, you can really use Margrabe's formula (as @Rylan said). It's exact solution, so there is good first test. You can use numerical integration (scipy methods for example) for test your Monte-...
K. Roman's user avatar
1 vote

Why is Implied Volatility more important than skew for put spread pricing?

All that is saying is that the level of the implied volatility curve is more important than the slope (which is more important than the curvature) when it comes to pricing these spreads. For argument'...
Newquant's user avatar
  • 769
1 vote

Why does bull call spread shows higher payoff than bull put spread?

How do you define higher payoff? Could you show what you compute? Do you look at what the options cost at the moment? If you want the same payoff (graphically and expiry), you can do the two things: ...
AKdemy's user avatar
  • 8,739
1 vote

Delta and Gamma profile

A calendar spread is nothing more than a short call and long call with TTM_1 and TTM_2. If you can find the quotes of those underlying options; you can retrieve the IV and hence the greeks.
simsalabim's user avatar
1 vote
Accepted

Call spread hedge

The most risk free way to hedge FX risk is using a forward. So if you will receive 1 USD in the 1 Year, and you wanted to protect the EUR value of this receivable, you would sell USD/Buy EUR 1 year ...
AlRacoon's user avatar
  • 6,447
1 vote

Vertical Spreads : Short/Bear Call vs. and Long/Bear Put?

The payoff diagrams look similar. Where they differ is in where the strikes are relative to the underlying. In the call credit spread, both the short call strike A, and the long call strike B are ...
AlRacoon's user avatar
  • 6,447
1 vote
Accepted

Butterfly spread calls and puts

Let's say K=1. If c=0.5, you get a shape like this (as you alluded to): And for c=-0.5, you get this shape: So does look like butterfly.
Magic is in the chain's user avatar
1 vote

How to price a strategy involving more than 2 different prices?

For such problems, you may consider the moment matching approach. For example, you can approximate the combination of terms where the coefficients have the same sign by a log-normal random variable, ...
Gordon's user avatar
  • 21.1k
1 vote

Valuating Prepayment on Loans- Which models are favorable?

BlackRock has the best commercially available prepayment model and Yield Book is basically the industry standard for trading and is decent.
Edward Watson's user avatar
1 vote
Accepted

Bjerksund and Stensland model, reasonable minimum value for Volatility?

After some testing, it is clear that a value of 0.005 is the most reasonable minimum volatility to use with this model. It is small enough to be a reasonable starting point (extremely unlikely that ...
Franchesca's user avatar

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