dm63
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Complicated American style option contract with numerous non-standard features (simultanous exercise, additional premium, etc.)
1 votes

The first thing that occurs to me is that Party B controls the exercise of both Option 2 and Option 1, so it is equivalent to Party B owning 2* the notional of Option 2. Have I misunderstood ...

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Why Central Bank carry out Qe when they can directly force banks to lower down the interest rate?
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The traditional tool of central banks is the direct control of interest rates. The interest rate being controlled is usually the short dated interbank rate ( federal funds rate in the US). If, in ...

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Swaption on a swap with 0 year tenor
1 votes

from a practitioner perspective, i can say there's no such thing as a 0 year swap (obviously). The shortest tenor that you could trade would be a contract on one month LIBOR or more likely 3 month ...

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Estimate yield of coupon bond given yield of zero coupon bond
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Let’s say the fair coupon on the 2010 coupon paying bond is C. Then this bond is worth 100. Its cash flows in 2007,2008,2009,2010 are respectively C,C,C, (100+C) and we can use the discount factors ...

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Best way to lock in margin rate via hedging
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Those are both reasonable ideas. The pros of the Treasury futures : a) very liquid b) works well assuming you are pretty certain you will pay margin for a 2yr timeframe. The pros of the Fed funds ...

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Converting US Treasury CMT to Discount Yields
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I think it is a coupon bond with semiannual coupons of $CMTRate$, thus a payment of $FaceValue*(1+CMTRate/2)$ at maturity and no other payments due. The $PV$ of this bond is $FaceValue*...

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Call Probability of European callable IRS
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0 votes

The call probability is just the probability that the swap rate for the remaining life of the swap is below the strike rate. This is easily obtainable in a normal vol model, it is $$N((Strike-Forward ...

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project curve spot risk (PV01) into forward risk (PV01)
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Yes. Ignoring discounting, you can say the following: 25k 3yr spot = 8.3k (0y to 1y)+ 8.3k (1yto2y) +8.3k (2y to 3y) 50k 2yr spot = 25k (0y to 1y )+ 25k (1y to 2y) 100k 1yr spot = 100k (0yto 1y) ...

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What is the intuition behind "jumps" causing volatility skew?
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The argument given in the OP doesn’t convince me. Yes, the dollar gamma of ATM options is the largest. But so is the Vega. Therefore the amount of implied volatility increase necessary to ...

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Carry vs Roll-Down on a zero-coupon IRS
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Most people would say: carry = the 1day p/l resulting from overnight rate being different from coupon = (3.2- 3.0)* 1day accrual. Roll down = p/l on remaining swap assuming spot rates remain the ...

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For a Floating Rate note, is there a way to convert the Discount Margin into OAS or Price?
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For a simple floater, the discount margin over the reference index equals the coupon margin plus the price discount to par (if any) spread over the life of the note. Thus, it is like yield to ...

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Find arbitrage opportunity in the given market model
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Isn't it as simple as: 1) wait one period 2) if the stock is at 8, buy it. If the stock is at 2 , do nothing. This is an arbitrage strategy, since there is a positive probability of a risk free ...

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Why are FRA/futures convexity adjustments necessary?
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It’s an ok explanation until the last 2 paragraphs. You should say :” in order to offset this advantage from SHORTING futures versus the FRA....”. And then the equation is $$FRA rate = Futures\space ...

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In Arrears Swap - what accrual period applies?
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It is 2 above. The logic is that the payment at the end of any given period is given by rate for that period * day count for that period (using the dates of that period). Changing the date of the ...

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Pricing Uneven FX Swaps
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I'm not sure what you are trying to calculate there. Those amounts you are calculating seem to be the dollar amounts, but you are saying they are EUR. I think the point is that if the client wants ...

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What are the impacts of the discontinuation of benchmark Interest Rates?
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In the US, the clearing houses have announced a new swap contract which is a fixed rate versus SOFR, which is a repo based rate that will be observed and compounded daily, paid probably annually or ...

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Physical Delivery of Single Currency Fixed-Floating IRS
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I think physical means that BRL currency amounts will be delivered on each fixed and Floating rate payment , whereas cash means that each payment is translated into USD at the then current BRL/Usd ...

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why the implied repo rate is higher when choosing the last delivery date to deliver rather than first delivery date
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It's because $Invoice Price$ in your equation is the Dirty Invoice Price, meaning $$Invoice Price= Futures Price*Conversion Factor + Accrued Interest$$. The Accrued Interest grows as the delivery ...

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Bermudan Swaptions
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See Blyth "An Introduction to Quantitative Finance" which has a whole chapter on the elementary properties of Bermudian swaptions and answers pretty much all of your questions.

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Swap rates comparison
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As you can see the swap rate is a weighted average of the forward Libors. Since Libor>OIS, we typically have df(OIS)>df, so the OIS discounted swap rate is more heavily weighted towards the back end ...

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Making mathematical sense of the expression for realized bond return
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I don't agree with your expression for AbsReturn. It contains two terms which have been divided by (1+y0). Why have these been discounted? The AbsReturn is just value(t=1) - value(t=0) with no ...

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A more mathematically rigorous explanation for why in the B-S model, the expected return on a call goes down as the stock price goes up
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I have a different take on this: in the Black Scholes framework, the expected return on all tradeable assets is the risk free rate. It doesn't matter what the stock price is. That's because the ...

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Is it possible to hedge Spread Risk on a Forward Swap?
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You can take out a loan for the whole time from now until the end of the forward period, except that from now until 2020 the loan is unfunded, so you just pay an annual commitment fee. Banks should ...

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Name of this type of purchase agreement?
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0 votes

That's not quite right. Lone star essentially pays 1.7bn for a call option on the CDO, struck at 5bn. If the cdos are worth less than 5bn, lone star defaults and Merrill collects the cdos. This ...

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Why Is Bond Time Value Risk Not Considered in Bond Immunization?
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In practice people do look at the time decay of bond portfolios, as follows: Often the "carry" is calculated , which means the profit or loss over the next day making the assumption that bond yields ...

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Distribution of pay-off of an exotic option
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Let's take a call option on a stock with exercise price $K$. What is the risk-neutral probability of a payoff $x$? $$P(x=0) = P(\text{stock} \le K)$$ Also we have $P(\text{payoff} = x > 0) = P(\...

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Falling Futures prices positively correlated with interest rates
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Your comparison is not quite apples to apples. You should compare one futures contract at (n-2) with (1+r) forward contracts. That makes them equal in terms of equity exposure. If you do this, you ...

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Is Value At Risk additive?
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You need to square them, add the squares , and take the square root. (Variances are additive, not standard deviations).

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Bond Duration hedging with long convexity
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More typically this refers to a portfolio like: Long 100MM 10yr bond with coupon 3% Short 180MM 5yr bond with coupon 3% with the principal amounts chosen such that the BPVs in dollars are equal. ...

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Estimate The Interval For European, Say 6 month, At-the-Money, Gold Price Collars
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There is an infinite set of pairs of strikes that form a costless collar, since for each (positive) put strike there is a call strike that makes the put price equal the call price. Within each pair, ...

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