river_rat
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2 answers
8 votes
2k views
Which process is the most commonly used for modeling stock prices?
5 votes

Cant talk specifically to stock pricing models but in foreign exchange the list in order of use goes: Geometric Brownian motion with time dependent vol and drift Local Volatility, either SABR or some ...

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2 answers
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161 views
Trading OTC FX options: choosing expiries
4 votes

The treatment of off the run expiries differ depending on if you are a client or a counterparty in the transaction. If a client asks me for a strange date in a reasonable size I would do some simple ...

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2 answers
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119 views
FX option quotation in interbank market
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The fx interbank option works by dealers quoting standard runs of implied volatilities on specific tenors and product types (fly/strangle, risk reversal and at the money) which are currency pair ...

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1 answers
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55 views
How are currency exchange rates on yahoo finance computed?
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According to the finance data disclaimer (https://help.yahoo.com/kb/exchanges-data-providers-yahoo-finance-sln2310.html) the source for fx rates is the ICE data service.

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1 answers
2 votes
196 views
Calibrate Stochastic Volatility Model
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In an incomplete market, vanilla options are independent assets like stocks or bonds. So the best way of thinking about how they are priced is the same way equilibrium prices in those markets occur: ...

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1 answers
1 votes
107 views
true or false: the risk-neutral measure is useless in this situation
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3 votes

Risk-neutral pricing is to help with relative value type questions: If I know the value of this what should the value of that be if it depends in some way on this. It doesn't help with absolute value ...

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1 answers
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72 views
Is the moneyness of a barrier option based on the strike value or the barrier when mapping to a volatility surface?
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2 votes

If your barrier is american and your market has any sort of volatility skew then trying to map some sort of moneyness measure to the vol surface will almost certainly fail. That is due to the fact ...

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1 answers
2 votes
145 views
Are bid-ask spreads in options related to bid-ask spreads in their underlying?
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There is a relationship and it comes about two seperate ways. A live price of an option (so one traded without delta) will be wider in an illiquid market then a liquid one as the market maker would ...

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2 answers
4 votes
571 views
Forward skew generated by Local Vol model
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The forward skew of a model is easy to see by pricing floating strike forward starting options in said model. If you do that to local vol, calibrated to a realistic volatility surface (where the near ...

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203 views
Stochastic Volatility Models - are they complete markets?
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You generally need one tradable asset per source of risk in your model that is someway dependent on that noise. So in a world where you can trade a single stock, but have two sources of variance your ...

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1 answers
1 votes
64 views
Canonical text on numerical PDEs in finance
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I got a lot of mileage out of Daniel Duffy's Finite Difference Methods in Financial Engineering: A Partial Differential Equation Approach.

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1 answers
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63 views
What does buying back a "short strike" for .05 mean?
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2 votes

To buy back a short strike is to buy back an option you have sold to the market, thus closing out the position. In this case it would be putting a bid at 5c per contract.

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318 views
Why is overnight more expensive than spot in an increasing forward swap values table?
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2 votes

Looks like day count to me, as in overnight is a three day run in this example while tom-next and spot-next are only one day runs. It is easier to use points per day to work out relative value (or ...

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72 views
FX quoting convention
2 votes

Fx volatility quote conventions are typically esoteric and befuddling. For example, EUR/USD 1m ATM would be the volatility at the strike of a zero spot delta (without premium) straddle. The quote is ...

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1 answers
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Is an 18 month OIS a bullet?
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1 votes

SWPM is your friend when it comes to coupon schedules. If I recall correctly, 18m SOFR pays at 12 months and 18 months.

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1 answers
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Barrier shift consideration in delta hedging down and in puts (PDI)?
1 votes

Shadow barriers (the fx name for this strategy) work for market makers as they super-replicate the option in question. The trick here is to realize that the option bought from the client was priced ...

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111 views
Compute forward swap rate from spot swap rate?
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1 votes

The 5y swap is effectively the weighted average of the 2y and 3y2y swap if discount rates are low enough and maturities are short enough. Lets suppose your discount curve is flat and zero, so all we ...

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2 answers
1 votes
180 views
How is forex market Quote-Driven?
1 votes

To add some colour to the FX market structure: FX used to be a clear two tier market, the closest analogy I can think of is a hub and spoke system with customers interacting with dealers via a quote ...

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1 answers
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152 views
Correlation effect in Quanto options
1 votes

The correlation comes into the replication (and thus hedging) of a quanto and not explicitly in the final payoff. In a sense you are trying to hedge a linear payoff with a linear hedging instrument (...

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1 answers
5 votes
211 views
Why were cross-currency swap basis so close to zero before the financial crisis?
1 votes

The way I rationalize it is to consider the different meaning for what Libor was pre and post the GFC. Pre the GFC, Libor was the price of USD for European banks. They are structurally short USD and ...

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127 views
When you rollover a FX Forward, do enter the FX swap at the spot rate or previous forward rate?
1 votes

FX swaps struck at non-market related rates are generally frowned upon in the Global code as they can be used as ways of extending credit without proper authorization. For this reason extensions are ...

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FX hedged investments
1 votes

Forwards have a large impact on the spot market, swaps much less so. For example a 100m usd swap against mxn has a spot delta of less than 1m usd for all tenors less than a year ( and actually quite a ...

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202 views
Market neutral strategy with quarterly futures and perpetual swaps?
1 votes

A perpetual swap is just a contract-for-difference. Assuming the basis for bitcoin is solely driven by interest rate differentials (spoiler alert: it is not) then the total cost of carry of holding a ...

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221 views
How is calculated the futures/forward convexity adjustment for FX?
1 votes

The futures/forward convexity adjustment for non-interest rate futures only tends to matter for futures with maturities greater than a year (which tend to be part of bespoke structures and not traded ...

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1 answers
3 votes
186 views
Stochastic Volatility vs Vanna-Volga
1 votes

Vanna-Vega-Volga is a cute way of interpolating the fx implied volatility surface. The problem is that the vols coming from that interpolation do not match the interbank quoted volatilities, you can't ...

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1 answers
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47 views
Futures and Forwards in Relation to No-Arbitrage Axiom
1 votes

Forwards and futures only need to agree on price in a world with deterministic interest rates as a general rule (it is possible to cook up examples of random rate models where the correlation between ...

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3 answers
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123 views
Is there an arbitrage opportunity if the forward price is different from the true expected value of the asset?
1 votes

Arbitrage no, profitable yes. Remember arbitrage implies riskless, and given only the underlying and a bond you can't create a riskless profit. However, in this case just buying the forward and ...

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3 answers
2 votes
178 views
Premium Currency and Volatility
1 votes

As a general rule of thumb, the price of a thing should not depend intrinsically in the units of value in question. Since quoting something in X per 1 unit of a base currency or 1/X per 1 unit of ...

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1 answers
1 votes
273 views
Under what conditions will both European and American put options worth the same?
1 votes

If the underlying is driftless (think futures) and the value of the option is not discounted (think future style options with daily bilateral variation margin or CSA's with zero collateral interest ...

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117 views
Dax 30 Portfolio optimisation
1 votes

The problem being convex depends on the structure of the quadratic constraints in this case, particularly if the quadratic part is positive semi-definite. So you need to write out the constraints in ...

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