# Tag Info

6

Pipeline constraints have resulted in a build up of stock in Texas. The high supply and constraints in exporting result in a spread between WTI and Brent. Determining an upper bound on this spread is nontrivial. One could look at alternatives to the pipelines (like rail contracts). However caution is needed in determining bounds as can be seen in Canada. ...

6

There are quite few factors that lead to the WTI vs. Brent Crude spread. Firstly in oil trading there are many different types of crude oil grades traded around the world. However, the most popular traded crude oil grades are Brent Crude and West Texas Intermediate (WTI). To understand the differences one first needs to understand some terminology. ...

5

The answer to your first four questions is affirmative. Option-adjusting the spread makes an equivalence between everything theoretically possible, but the quality of results depends significantly on the quality of your interest rate model and its calibration. My personal opinion, though, is that the results need to be treated carefully because the OAS ...

5

Trading bond futures calendar spread is actually a very involved exercise, with many moving parts. But first things first, recall that bond futures price is approximately: $$F = \text{spot price} - \text{carry} - \text{delivery option value (DOV)} \pm \text{rich/cheap}.$$ So calendar spreads represent the differences in spot prices, in carries, in delivery ...

5

When trading options it is most useful to think in terms of implied volatilities, rather than option prices. For vanilla options, there is a one-to-one relationship between implied volatility and price, and the Black-Scholes formula gives the conversion between the two. Since price and implied volatility are interchangeable, you can convert both the bid and ...

4

Net the vegas of the individual options in the spread. Inherently, the closer together the strikes, in the spread are, the less sensitive to changes in implied vol the spread is. The opposite is true for wider spreads. Technically, the wider the spread the more it follows the dynamics of the skew itself, depending on where the spread is relative to at-...

4

This is known as a 'crossed' book, the exchange will attempt to uncross the book at the price at which the maximum amount of volume can trade. In your example at the price of 42 there's only 3533 amount of buying quantity, and there are more than enough sellers to cover this. At a price of 40, there's now 3533+425 buying quantity willing to trade, and still ...

4

Tough to answer specifically because I don't know what bonds you're looking at, but my guess is it has less to do with the spread-building blocks and more to do with the base curve. G spread is based off the interpolated government bond curve, and Z spread is off the Swap curve, if you mouse over on YAS it will show you the base curve. Since right now the ...

4

These total return swaps are basically funding trades. The seller of total return is putting the risk on their balance sheet. In order to pay the total return to the buyer of total return, the seller would need to hedge their risk by buying the risk of the asset. If effect, the total return seller is lending the total return buyer the funds to gain the ...

4

Im interested in this topic myself. I haven't found anything of a good standard yet. However, there are some pamphlets from CME that could be useful as an initial exploration. I will keep looking and improving this answer. Overview of Inter-Commodity Spreads for Interest Rate Products. CME Group Yield Curve Spread Trades: Opportunities & Applications. ...

3

this is how i would explain your approximation. First start with notation: Define $K_{atm}$ to be the atm strike. Define $\Delta K := K2 - K1$ where $K2 > K_{atm} > K1$. This corresponds to $\Delta K = $$StrD in your notation. Now assume a black scholes world, within this world we can approximate the Call and Put price of an atm option with: C_{atm}... 3 There is no such thing as a "proper" interpolation of CDS spreads. The only criterium your interpolation must obey is the absence of arbitrage. Note that, assuming that spread(3M) < spread(6M), spread(4M) can take any value between spread(3M) and spread(6M) without creating an arbitrage opportunity (actually it can be even slightly less than ... 3 It depends on the exact structure. E.g., a butterfly can be bought or sold and every market participant understands which individual options are bought or sold given knowledge of the agreed spot level and distance of the wing from spot in regards to agreed strikes. Please note that a butterfly can be structured as a combination of calls but also through ... 3 As @babelproofreader mentioned, I recently blogged about the Roll model (see the original paper), which provides a very simple method for inferring the bid/ask spread based on trade prices. In short, you can estimate the cost using using the covariance: c = \sqrt{\gamma_1}. Where \gamma_1 is the Cov(r_t, r_{t-1}). (The R code is provided in my post). ... 3 I have upvoted Chris Taylor's answer, which has the best approach, particularly for near-the-money strikes. However, for illiquid options and far-out-of-the-money and far-in-the-money strikes, you will often find that bid prices are below intrinsic value, i.e. smaller than even Black-Scholes gives even with \sigma=0.0. With no volatility here, it is of ... 3 That is the concept of Cointegration Regressing two non-stationary variables results in spurious regression. However, if these two variables are cointegrated, spurious regression no longer arises. As stated on p. 120, We call these resulting betas a cointegrating vector. Cointegration is a statistical property of time series, mainly proposed by Engle/... 3 DV01 is defined as$$ \text{DV01} = -\frac{dP}{dy}, $$so technically you could run a regression of futures price changes vs (CTD) yield changes. The resulting DV01 is known as empirical DV01. In the context of trading bond futures, shorter-term horizons such as 3m and 6m are typically used. The chart below shows the actual TY/WN hedge ratio and an ... 3 Yes that’s pretty simple : for the purposes of defining the swap spread, we assume that the libor leg of the swap is at libor flat. 2 When speaking with quants, I call such things Boundary Conditions. With traders I tend to use Terms or Features. 2 First, I assume that when you say: And I was no wondering if it would be a good idea to place bid/ask offers instead of limit orders... You mean that you are going to be placing non-marketable limit orders inside the posted bid/ask spread; whereas before you were sending marketable limit orders that crossed the spread. You didn't mention the type of ... 2 You are referring to the Penny Pilot Program. Only options whose premiums are quoted at a price less than \3 may be eligible for penny increments, except for IWM, QQQ, and SPY, which are always quoted in pennies. The list of permitted classes doesn't seem to come from specific volume criteria. Instead, the SEC and the exchanges together roll-out names in ... 2 This spread can't be statically synthesized. However you can synthesize it dynamically by trading in the underlying contracts. You would first value the option using standard theory (this involves solving a two-dimensional PDE, or using Monte Carlo) to get a price V(F_1,F_2) in terms of the prices of the underlying futures contracts. Then the holdings in ... 2 If you are after treasuries, you can check http://www.newyorkfed.org/research/staff_reports/sr381.pdf which discusses trade impact on BrokerTec. If you are after equities, the literature is enormous, you can pretty much google for "trade impact limit order book" or smth similar. In practice, it's an empirical approach: you put all the factors, that seem ... 2 You should turn to market microstructure research. Large and frequent trades can temporarily increase the spread and observed transaction price. Additionaly, trades done near the release of new information ( macro news, firms news,...) most likely need to overcome larger spreads. 2 The DTS paper (Ben Lor, Dynkin et al) describes how DTS (duration times spread) can be used as both an exposure to a common factor, and a measure of specific risk. Assume that relative spread changes for a set of bonds i\in I are described by an exposure to a common risk factor, and a specific risk, that is$$ \frac{\Delta s_i}{s_i} = \frac{\Delta s_I}{... 2 I realize the previous answer doesn't answer anything, yes the spread over LIBOR on the swap is such that the swap has 0 value at inception, but how do you compute the value of the equity leg ? The spread on an equity swap depends on the level at which you can repo the underlying equity if you replicate the swap through a buy and sell transaction + a stock ... 2 I suggest searching all the possibilities using Excel. Code the option pricing formulas into VBA functions (if you have not done so already) with cell to hold option strikes and quantities, and then set up your price scenarios for a grid of 1% moves in the underlying. You have now reproduced the information contained in your Bloomberg plots pictured above.... 2 if they are stocks, this problem is called pricing a Margrabe option and it is generally solved by change of numeraire. Take$S_2$to be the numeraire. Then the value of the option is $$S_2(0) \mathbb{E}_{S_2}( (S_1(T)/S_2(T)-1)_+)$$ where the expectation is taken in the measure that has$S_1/S_2\$ as a martingale. Since it's a martingale and log-normal at ...

2

There are two test methods described in Aronson's book; White's Reality Check and a Permutation test. At the heart of both is the idea of a "position vector," e.g. a numerical vector of a series of 1, -1 or 0, which correspond to long, short or neutral positions. For example, a vector of [ 1 1 1 1 1 0 0 0 -1 -1 -1 -1 ] would represent being long for 5 ...

2

The intuition behind the statement "if correlation increases, the spread of a CDO junior tranche decreases" is as follows: If correlation increases, more probability mass of the default distribution is moving to the tails. The risk of joint default increases, but at the same time the chance of joint survivals increases. So the higher correlation, the higher ...

Only top voted, non community-wiki answers of a minimum length are eligible