dm63
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3 answers
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784 views
Pricing of convertible bonds
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I think the point of this approach is to model the firm value $V(t) $ using some appropriate probability distribution, then deduce the dustribution of the CB price. Thus the CB price depends on the ...

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1 answers
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53 views
Yield Curve Movement: Risk/Reward versus Safe Haven Demand & Monetary Policy Expectations
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You're missing something important. Sovereign credit ratings are very misleading when the sovereign can print its own money (like the UK). I would argue that every country is AAA in debt of its home ...

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512 views
Sharpe Ratio and your annualization
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SR increases as a function of measurement frequency because the random components of the return have a greater chance to cancel out for longer frequencies. There's nothing mysterious about that. ...

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1 answers
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78 views
Impact of the interest rate volatility in the valuation of a bond
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It depends what type of interest rate model you are using. If rates are normally distributed, the situation should be as you describe, so there should be minimal exposure to implied volatility. If ...

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692 views
Monte Carlo, convexity and Risk-Neutral ZCB Pricing
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There's nothing wrong with your formulation, in my opinion. If you model the rate z_30 with a fixed mean, then indeed the forward ZCB price is long vega. This means that the forward interest rate is ...

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4k views
SABR Calibration: Normal vs Log-Normal Market Data
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I think (1) is the issue. You need to compare market normal vols to normal vols implied by the sabr model. (2) is not the issue - these vols look reasonable. By the way we express normal vols in ...

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213 views
BSM Model - Actual probability
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Any position that is long the market. Eg long stocks, short puts on stocks etc, is being compensated for taking risk. Any position that is bearish eg short the market, or short calls on the market, ...

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780 views
Parametric VaR of a portfolio including a swap
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Treat it like a fixed rate bond with the same maturity date. The principal amount of the fixed rate bond is equivalent to the notional of the swap.

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3 answers
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195 views
What does a negative stock amount mean in a single-period, binomial market model?
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I don't have any problem with the short stock position. In real life, you borrow the stock (costing some pretty small amount), sell it in the market, and receive cash, which you can deposit to earn ...

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144 views
Swap curve and short maturities
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There's clearly no such thing as a one month par swap with a floating index of 3 months. So you're really just asking what a typical model kicks out of you ask for that rate. In my view the most ...

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2 answers
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4k views
Why is the term structure of the implied volatility surface non-monotonic?
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Since equity option prices on the "wings" (i.e. deep out of the money puts and calls) often trade at significant volatility premiums to ATM, it's highly unlikely implied vol will be monotonic. The ...

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2 answers
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2k views
Is there any gamma in basis (i.e., floating for floating) interest rates swaps?
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In practice a 3s-1s basis swap has negligible gamma. Imagine putting on the basis swap, then the basis swap market moves. The resulting profit or loss is the present value of a fixed annuity, whose ...

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5 answers
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1k views
Black-Scholes formula proof, without stochastic integration
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In Blyth "Introduction to Quantitative Finance", the Black Scholes formula is derived without explicit use of stochastic calculus as follows: (i) show that on a binomial tree, use of risk-neutral ...

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655 views
Put-Call Parity Application
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In the binomial model suppose the stock can go to either U or D. Suppose the option strike is K where D < K < U. If stock goes to U, call payout is (U-K) and put payout is 0. If stock goes to D,...

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3 answers
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233 views
How would I exploit arbitrage if risk-neutral pricing doesn't hold? (Option Pricing)
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You ask what to do "if risk-neutral pricing does not hold". By this I assume you mean that the price of an option is not equal to its expected value under the risk neutral probabilities (these are ...

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6 answers
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3k views
Intuitively speaking, why do at the money options have no volga/convexity?
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Suppose you have two stocks, perfectly correlated, both initially at 100, but one has exactly twice the dollar standard deviation of the other. Then the payouts of a $100 call are exactly in a 2:1 ...

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187 views
Do Bond Put Dates always fall on Coupon Dates (for non-zero coupon bonds). Calculation rules for Coupon Dates
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In my experience, put dates always fall on coupon dates. However, exercising the put should still entitle you to the coupon, since you have held the bond for the whole coupon period (or somebody has)....

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29 views
How does Fed Qe affect the housing sales in the US? Why does it happen to be that way?
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There is a contradiction in your statement. If QE supposedly motivates house sales, then the price should indeed go down. I think you are trying to say that QE should motivate house purchases. Well,...

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550 views
Bond Prices in terms of short and forward rates
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This says that if rates are deterministic, the spot rate follows the forward rates that are initially observed. Makes sense.

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