dm63
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  • NY, United States
Why is the fair strike of a variance swap called implied volatility?
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The language around implied volatility can be a bit loose. For example, the Black-Scholes implied volatility of an at-the-money call on a stock could be 15%. For a 10% out-of-the-money put option on ...

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Why is LIBOR rate smoother than the US treasury rate?
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It's because the Bill rate is observed from an active marketplace with billions of dollars of transactions, whereas Libor is the result of a daily poll of large banks, who tend to move the rate ...

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FX hedging: forward rate and implied forward rate
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I don't really agree. The corporation could issue dollar debt, convert the proceeds into Euros and then use this to reduce their amount of Euro debt (either buy some bonds back or issue less). Thus, ...

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Australian Treasury Bonds - Price Calculation with Accrual
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Adding to @Delsim answer, the formula gives the total value of all cash flows, or the dirty price of the bond. If you want the clean price you need to subtract accrued interest from the formula.

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Bucketed gamma for swaptions
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I think the likely explanation is as follows: the gammas with respect to different parts of the curve are being calculated by asking: if I bump the whole yield curve in parallel (up and down by a ...

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Treasury spline curve, practical question
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That's a reasonable question. I would say most of the time, participants will agree which bonds look 'cheap' and which look 'expensive'. This is because usually the forces of supply and demand have ...

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How do you factor in skew when assessing implied volatility for a non-atm option?
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Here are two questions you should ask: (1) looking at historical information, how cheap has the 20pct otm call traded at versus the ATM ? Is the 2 point discount high or low versus history (2) what ...

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Intuitively, why does liquidity premium contribute to bond yield?
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I do not find convincing the argument that the yield curve is upward sloping due to the lack of a secondary market for longer dated securities. In fact, there is a highly liquid market for 2yr, 5yr, ...

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ISDA Convention for definition of IRS maturities
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Two counterparties can agree any date they choose as the maturity date. IRS, being bilateral over the counter derivatives, are completely customizable. Having said that, on any given day the most ...

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What exactly is the nature of swaption vol data?
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The following is approximately correct: use Normalized vol for the period that it is available, and prior to that , use Black vol * (the at-the-money forward rate). The forward rate is available on ...

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Is it possible to buy/sell a futures contract with a non-zero initial price?
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You can almost do it using futures options. For example , if a futures contract is trading at 97.00 you can simultaneously buy a 98.00 call and sell a 98.00 put expiring at the next available listed ...

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Which volatility input for in-arrear convexity correction?
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It is the implied volatility of an instrument which has expiration $T_i$ with an underlying rate from $T_i$ to $T_i+1$. If $T_i+1 - T_i$ is a short period such as 3m or 6m, this is a cap volatility. ...

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DV01 approximation
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Yes, if yields go up, prices go down and vice versa. Whether or not the dv01 is quoted as positive or negative is purely a matter of convention. I personally prefer negative dv01s for long bond ...

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Differentiate a good from a bad bid-ask spread
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I think what matters is the size of the BAS versus the volatility of the underlying stock. If that ratio is small, it's better to be a price taker. If it is wide , it is better to be a price maker. ...

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option on bond future - any caplet representation out there ?
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There should be the analagous result for options on a forward zero coupon bond purchase, as follows. The payoffof a K-call, paid at $T_{for}$ (not $T_{opt}$) is $$[P(T_{opt},T_{for},T_{ctd})−K]^+$$ ...

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Which barrier option has negative gamma?
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How about a digital call option struck at usd 100 expiring tomorrow with today's stock price at usd101. This has negative gamma, since any volatility is potentially bad.

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Calendar spread pricing: how find the final value of call long
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Conceptually , the value of a calendar spread at T1 equals the "time value" of the remaining option. The time value equals the total value minus the intrinsic value. This time value is obviously a ...

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Calculate $E^{\mathbb{Q}}\left[e^{-\int_{0}^{T_2}r_t\,dt} \frac{S\left(T_2\right)}{S\left(T_1\right)}\right]$
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An alternative proof: The contract may be replicated by waiting until $T_1$ and then investing one dollar in the stock. Hence its value must be the same as a zero coupon bond priced at t maturing ...

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Impact of the maturity date of a future on its risk
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In the case of Equity indices or bond futures , the longest contracts traded are only a few months out, and the difference between the dynamics of these versus the front contract are small. In other ...

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Proxying historical bond futures duration
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A better suggestion is to use the cheapest to deliver bond (CTD) of the deliverable basket rather than the On-the-run. The CTD is usually of shorter maturity than the on-the-run , so it will make a ...

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Why would borrowing rates for repurchase agreements be negative
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Why are repo rates in Euro negative? Because the policy rates of the central bank (the ECB) are negative. In other words, the ECB policies cause overnight repo rates to be negative. Yes, if you ...

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Returns on actively trading bonds compared to equity?
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Theoretically, actively trading bonds versus passively holding bonds shouldn't result in extra expected returns, assuming that you are holding on average more or less the same amount of bonds as ...

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Pricing Cancelable swap
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On the second question, you have the choice to pay $(S_t - K)$ at $t$ or $(S_T - K)$ at $T$. The value at $t$ of deciding to pay now versus later is: Value at $t$ of paying $S_t - K$ at $t$ - ...

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Is return required by a bond investor a function of base interest rate and credit worthiness of the issuer?
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Yes, in the US, the yield on a bond equals the yield on a US Treasury bond with a similar maturity plus a credit spread reflecting the creditworthiness of the issuer. If the issuer is high quality ...

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What is the delta of a zero coupon bond?
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The delta is (value of bond) - (value of bond if rates go up 1bp) =5mm/(1.0210)^5 - 5mm/(1.0211)^5 =$2206

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The settlement and payment date of Eurodollar
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The futures contract pays off every day during its life, with the last payment at T. There are no payments after that. When Hull is talking about a payment at T+.25 he is referring to the payoff of ...

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Basic binomial option pricing example
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The correct valuation is C=5, assuming the stock is trading at 100. Any other option price allows an immediate arbitrage opportunity between the option and the stock. Whether the stock should be ...

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How are LIBOR rates beyond 12M arrived at?
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If you want to estimate interbank lending rates beyond 12 months, the best you can do is look at where bonds issued by banks are trading. Sometimes there is loose talk (even by interviewers) that ...

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Traders view on hedging of FX Futures with FX Forward
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Fx futures and fx forwards with the same expiration are an excellent hedge for each other. They basically trade on top of each other.

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If a struggling company issues preferred stock, won't its share price hit rock bottom
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It's true that common shareholders will be subordinated to the new preferred shares, but if a company is close to defaulting on its debt, the infusion of cash from a preferred issue may be better for ...

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