dm63
  • Member for 6 years, 2 months
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  • NY, United States
volatility of a mid curve option
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11 votes

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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Callable bonds with very short call period. Purpose?
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10 votes

It's because of a bank regulation called the Liquidity Coverage Ratio. This says that if you have liabilities of less than 30 days, you have to hold liquid assets against it. To avoid that , you ...

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What is the industry standard pricing model for CME-traded Eurodollar future (American) options?
9 votes

Having traded these options for a number of years I have some insight. It’s my belief that those that make a living specifically out of these options do have tree-style models that take into account ...

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How is this probability (45%) of Fed raising rates 3 times in 2017 calculated from Fed Funds market?
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9 votes

Using the following data from 12/18/16: Jan 2017 Fed funds futures =9936, Jan 2018 Fed Funds futures =9877 implies that 99.36-98.77 = 59bp of hikes are built in for 2017. IF you assume the only two ...

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SOFR Discount Curve Construction in Nov 2021
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8 votes

Fixed vs SOFR swaps for longer maturities are very liquid, since the interbank market trades these directly now, and these are the best instruments to construct the long end of the curve (2yr to 50yr)....

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What's the point of stochastic volatiliy models if you can use local volatility?
7 votes

Well, what you find is that the introduction of stochastic vol changes the delta of your options. So what does this mean? If the new delta reduces the variance of your hedged portfolio versus the ...

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Black-Scholes vs Black equation
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7 votes

It's the forward rate which is fundamental to pricing for both stocks and interest rates. In the case of interest rates (unlike stocks) , it's difficult to compute the forward rate given the spot ...

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Carry calculation on an interest rate swap
7 votes

It turns out that the two things are the same, appropriately scaled. Proof: we can construct a 5 year swap using 3 month libor combined with a 3mo-4.75yr forward swap, weighted by the dv01s of each ...

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Skew and shadow delta
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7 votes

Basically, the author is saying that the delta of an option, $dC/dS = \frac{\partial C}{\partial S} + \frac{\partial C}{\partial v}\frac{\partial v}{\partial S}$, where the $\frac{\partial C}{\...

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LIBOR replacement in client products and prospective pricing
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6 votes

This question is the subject of much current debate amongst regulators and banks. You are absolutely correct , many banks are alarmed that the demise of Libor will make their asset-liability ...

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US overnight swaps (OIS)
6 votes

Well, OIS is actually a style of swap, based on overnight rates. It could have a Fed Funds or a SOFR underlying rate, or anything else. Up until recently , it was assumed in common parlance that OIS ...

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Asymptotics of Call Option as $S\to0$
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6 votes

This is more of a math question than a quant question. Under Black Scholes dynamics (assuming $r=0$ for simplicity), as everyone knows we have $$C=SN(d_1)-KN(d_2)$$. In this case, we are interested ...

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FX option trading questions
6 votes

Yes, in the sense that it is assumed that the delta will be passed between participants at time of execution. Not necessarily. A non delta neutral trade may be used for speculation , or for hedging.

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Gamma Pnl vs Vega Pnl
6 votes

Not sure this is a valid question! Gamma p/l is by definition the p/l due to realized volatility being different from implied. Vega p/l is by definition the p/l due to moves in implied volatility. ...

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Violation of the call-put parity
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6 votes

On 10/24/17, Wells Fargo announced that they would pay a dividend of 0.39 to holders of record on 11/3/17. Thus, if you buy the stock after this date (through the exercise of the call) you do not get ...

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Swaption Trading
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6 votes

At most banks, swaption traders have models that allow non atm volatilities to be controlled by two parameters. Specifically , a parameter to control the smile (richness of out of the money options) ...

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Why is there a stong intraday-correlation between spot and vol?
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6 votes

This effect is coming from the supply and demand in the options markets. Many portfolio managers want (or need) to buy out of the money put options, and many are willing to sell out of the money call ...

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European Swaptions: does implied volatility of swap rates decreases both with start and tenor?
6 votes

You are asking about the term structure of lognormal implied volatilities for European swaptions, which is a two dimensional function (expiration and tenor). First expiration: typically (but not ...

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Is this process log normally distributed?
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5 votes

I’m sorry to say you’re not correct in your conclusion. The basic problem is that in the second to last equation $$dP/P=D^*\sigma_y y_n dW_t$$ the $D^* $ is not constant but is a function of $y_n$ ...

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Bermudan Swaptions - Payer vs. Receiver (LGM)
5 votes

I’m guessing you are finding that your model overvalues Bermudan receiver options and probably undervalues Bermudan payer options. The rationale for this has more to do with supply and demand than ...

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Convexity in a DV01 neutral trade
5 votes

Let’s say you do a 2s-10s steepener, dv01 neutral. What does this mean ? It means you are using the current dv01s of the 2s and 10s, which are approximately 1.99 and 9.12, to weight the relative ...

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Why isn't the delta of a slightly in the money American option 1?
5 votes

The delta is only 1 if the option is certain to be exercised. This is not the case if it is ‘slightly in the money’. If it is deep in the money, such that immediate exercise is optimal , then the ...

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Hull's book par yield example
5 votes

c is the coupon of the bond, so it is paid semiannually. You can see this from the LHS of the first equation, which is the sum of present values of the coupons and principal. The 6.87 and the 6.75 ...

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Option Price vs. Implied Volatility
5 votes

To add to @Jan Stuller answer , ATM options are pretty close to linear in volatility in the BS model (and exactly linear in the normalized Bachelier model). Options away from the strike are ...

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Inflation swaps rate vs. Break-even rate
5 votes

Yes, you could call this a liquidity effect. The 10yr breakeven rate is defined as the difference between the nominal yield of the 10yr Treasury and the real yield of the 10yr TIPS. The TIPS has ...

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SOFR term structure
5 votes

At this point liquidity in SOFR is provided by a set of futures contracts in the very short end of the curve , and then through Libor -SOFR basis swaps which are reasonably liquid up to around 5years, ...

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Intuition for Stock Price Numeraire Drift
5 votes

I have a take on the intuition part of the question. Isn't it a simple consequence of Jensen's inequality? Thus, assuming $r=0$ for simplicity, we have in the money market measure: $E(S_T)=S_t$, ...

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Price volatility and yield volatility
5 votes

The price volatility of a bond option is the implied volatility using a Black type model, so it is exactly analogous to an equity option, using the bond price instead of the equity price. Because ...

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How is 1y5y - 1y2y Treasury steepener trade executed?
5 votes

To do such a trade would require selling a 6 year Treasury , and buying a 3 year Treasury, both with a settlement date of one year from now. This is actually hard to do in practice, since not many ...

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Wrong proof that call price is concave function of strike price
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5 votes

It took me a while, but I think the statement $C(K_3) - C(K_2) \leq K_2 - K_3$ is not true if $K_3 > K_2$

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