11 votes
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volatility of a mid curve option

A swaption in which the underlying swap starts at a date materially after the expiration date is called a midcurve swaption. The implied volatilities of these can not be obtained from the regular ...
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  • 13.9k
10 votes

Why is USD LIBOR used for USD denominated securities?

Why does USD based security valuation have to give a thing about what London Banks think? Your question is based on false premises: the USD Libor is not determined by polling London based banks as ...
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9 votes
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What is the name and payoff of this exotic option (where the holder can lock in a price)?

The option described is called a "Shout" option.
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  • 5,285
8 votes
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Simple example of a funding valuation adjustment?

To discuss Funding Valuation Adjustments (FVA) it is first necessary to describe a situation in which such an adjustment would be needed. In here we will take as an example collateral mismatches, ...
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7 votes
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Valuing a warrant on a warrant

You are essentially dealing with two options: $EU\,{Warrant}(S_t) = BlackScholesCall(S_t)+CompoundCall(S_t)$ The Black-Scholes formula is known, and Compound Option pricing has various approaches in ...
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  • 5,629
7 votes
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Why is USD LIBOR used for USD denominated securities?

The importance here is that it actually does not matter in what time zone or market the libor rates are set. Key is that it is supposed (!!!) to be a gauge at what rate contributing banks could borrow ...
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7 votes
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How to trade interest rate futures calendar spread?

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} - \...
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7 votes
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Why must a riskless portfolio earn the risk-free rate?

If you imagine you have two risk-less assets that have a unit payoff at maturity $V_1(T) = V_2(T) = 1$ but their present value is not equal, e.g. $V_1(t) < V_2(t)$. You buy the cheaper, sell the ...
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6 votes
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Pricing foreign currency bonds - which approach is more theoretically "sound"?

In #2, you can use FX forwards to convert your JPY cashflows to USD but it is more common in practice to use a cross-currency swap for this purpose. Indeed, the advantage of the latter is that it ...
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  • 487
6 votes

Valuation of repurchase agreement (classic repo)

You are right in that in repo, one sells a collateral to another party and agrees to repurchase it at a fixed price in the future, and is essentially a collateralised borrowing. The difference between ...
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5 votes
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IPO Valuation: Share Pricing and Number of Shares

IPO valuation is super sophisticated. There is usually a Managing Underwriter, who has a team of analysts/asset pricers/investment bankers/lawyers/etc. with complicated terms and they go and value a ...
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  • 460
4 votes

Calculate Average Price, Cost, (Un)Realized P&L of a position based on executed trades

Using Andy Flury answer and bit polishing it gives following Python class for PnL calculator: ...
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  • 211
4 votes
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How to correctly calculate P/E ratio of Singapore stocks?

Just figured it out with the help from someone else... The market cap is in Singapore dollar because it's traded on Singapore exchange, but their income statement is in Thai Baht... That's why :)
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  • 313
4 votes
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Neural Networks for Estimation of Unmarked Private Asset Returns from Market Data

Based on an my updated understanding of your problem you have a portfolio consisting of $N$ illiquid assets. Valuations are not real time and usually lagged, by say, upto 3 months (or slightly longer),...
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  • 8,047
4 votes
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Global stock market valuations

Yardeni has lots of great valuation information. Below is a link to the forward P/E ratio by country, as requested. The update date is March 10, and the frequency is weekly, so this is probably as ...
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3 votes

Value of a continuous cash flow until a random time

As long as your market is complete and $\tau$ is measurable w.r.t. the filtration generated by the market the continuous cash flow paid until $\tau$ is a hedgeable contingent claim and you have to ...
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3 votes

Valuation of a swap where both parties can cancel (not settle at market) with accrual method instead of present-value?

Any time that a contract is cancellable by either party, it will be cancelled. That's because it is always to one party's advantage to cancel rather than carry on. The exception is that the contract ...
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3 votes

Finding the True Option Value

Basically it boils down to this: You either use a descriptive or a prescriptive (normative) model, i.e. you either think that the market is always right or you think that you alone know how to ...
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3 votes
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S&P P/E Ratio 2008 Spike Explanation

Bank earnings specifically, but yes. http://www.macrotrends.net/1324/s-p-500-earnings-history
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  • 46
3 votes
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Why aren't option pricing models more frequently used to value risky cash flows?

There are papers out there applying this approach. Try looking up Leland, Leland&Toft (1994 and 1996) for modelling corporate liabilities, resulting in a series of interesting results. Also, it ...
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3 votes
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How can you determine the correct significance of the Shiller P/E regression?

Overlapping observations leads to correlation of error terms Let $r_{t \rightarrow t+k}$ be the log return from time $t$ to $t+k$. Imagine you're running a regression forecasting $k$ year returns ...
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  • 6,334
3 votes
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Why does DCF discount at WACC and not risk-free rate?

A dollar to be received with certainty (for example, you have purchased a bill from the US government) at time $t$ will be valued at $e^{-rt}$. If you are uncertain about whether you will receive the ...
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  • 5,628
3 votes

Rate of convergence between price and value

I performed spectral analysis on the stock market for disaggregated returns. If $\mu$ is the center of location and anything away from $\mu$ is an "error", then the stock market is in equilibrium ...
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  • 4,092
3 votes
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Quantlib derivative valuation from zero curve

If you already have the zero rates, you can construct the zero curve using the set of maturities (dates) and zero rates values, in addition to a day count convention in this way: ...
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  • 2,110
3 votes
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Why use par-value weighted average when valuing portfolio of bonds?

Sums the market value times the par value for each bond Could you clarify that formula ? From what you wrote it seems to be just a way to dollarize the bond price (market value = 97%, par value = 200 ...
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  • 2,903
3 votes

Pricing under risk-neutral probabilities for weird derivatives?

@Gordon has already given the answer but here is a little more notes to it... At time time $T_2$ the holder receives $X=(S_{T_1}-K)^+$. According to Risk Neutral Valuation the value at time $t$ $(t&...
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  • 1,585
3 votes
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Covered Interest Rate Parity with FX Spot-Adjustment

A simple trick is being used to come up with the right discount factors. Since $D_T=\frac{1}{1+r_1}\frac{1}{1+r_2}\frac{1}{1+r_3}\cdots\frac{1}{1+r_T}$ and $D_S=\frac{1}{1+r_1}\frac{1}{1+r_2}$ we ...
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  • 9,077
3 votes

Tech companies valuation

If we talk about tech stocks in general, a majority of their value is tied up in more distant cash flows / terminal value in a standard DCF analysis. So if interest rates go up, the more distant cash ...
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3 votes

How to fundamentally value cryptocurrencies?

Investing in cryptocurrencies is a wild ride. There is obviously a lot of speculation involved but my question is another one: what are good models to evaluate the fundamental value of ...
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3 votes
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How to fundamentally value cryptocurrencies?

Having been to a Business school (not sure whether that's a badge of honor or a badge of shame :), I've covered the "established" valuation models, from comparative analysis, to DCF, to CAPM,...
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