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January 3rd, 2012, 8:50 pm
Forum: Technical Forum
Topic: Swaption vol parameterization
Replies: 3
Views: 16607

### Swaption vol parameterization

Thanks for the replies.
November 16th, 2011, 6:03 pm
Forum: Technical Forum
Topic: Swaption vol parameterization
Replies: 3
Views: 16607

### Swaption vol parameterization

<t>What is the typical vol parameterization used for interest rate swaption surfaces, it would be function of time to maturity and also tenor. In equities typically one parameterizes as vol(T) = a + b*(K/S)/sqrt(T) where a is atm vol and b is skew and I believe in FX one typically has vol(T) = a + b...
May 25th, 2010, 6:24 pm
Forum: Technical Forum
Topic: Constructing volatility surface for a basket
Replies: 1
Views: 29887

### Constructing volatility surface for a basket

There are some papers by following authors on this topic which were applied in equities:Marco Avellaneda, et. al in RISK.Peter Lee, et. al. in RISK.
May 25th, 2010, 6:13 pm
Forum: Technical Forum
Topic: Does local vol model overprices heston model ?
Replies: 11
Views: 34599

### Does local vol model overprices heston model ?

2% ain't nothing. Try pricnig a double no touch option using local and stochastic vol. I've seen difference of ~15% on some extreme skew underlyings in FX and ~5-10% for SPX.
April 6th, 2010, 1:24 pm
Forum: Programming and Software Forum
Topic: Bloomberg (Terminal) Manual
Replies: 16
Views: 91672

### Bloomberg (Terminal) Manual

<t>Let me just warn you that if you put in 5% dividend yield in OVX vanilla option price any sane person would assume it doesForward = Spot exp(-0.05*time)In Bloomberg in infinite wisdom doesForward = Spot/(1+0.05*Time)And of course there is no way to read about these treatments you just have to rev...
December 22nd, 2009, 5:03 pm
Forum: Student Forum
Topic: convertible bonds
Replies: 22
Views: 34769

### convertible bonds

<t>Optimal solution when as credit->infinity is to go short 100% stock and NOT convert. I can't think of a reason why you want to convert in the case dividend = 0 at least mathematically; there many be other reasons why one would exercise as some mentioned below.Ok first of all let's not mix credit ...
June 24th, 2009, 11:47 am
Forum: Technical Forum
Topic: Dupire Formula with Absolute/Discrete Dividends
Replies: 14
Views: 178795

### Dupire Formula with Absolute/Discrete Dividends

<t>Use diffuse forward/future instead of spot, then when you need spot just take spot = Future inverse(F) at each grid point and compute payoff. Future/forward doesn't jump across dividends so Dupire formula holds as is. You will probably want to use premium formula instead of implied vol formula un...
June 4th, 2009, 8:20 pm
Forum: Technical Forum
Topic: FX model used in market now
Replies: 3
Views: 39169

### FX model used in market now

<t>Thanks that's helpful. Given the ill-defined inverse problem here, how does one deal with it? I guess they calibrate to both vanillas and DNT and Barrier and whatever they can get hands on. Wonder what are some constraints on the spot/vol process that one can impose while reproducing all liquid e...
June 3rd, 2009, 2:07 am
Forum: Technical Forum
Topic: FX model used in market now
Replies: 3
Views: 39169

### FX model used in market now

<t>In FX, there are plethora models such as 1) local vol, 2) stochastic vol, 3) local stochastic vol, 4) vanna volga to price exotics. Currently, what is the market standard for pricing exotics in particular one touches and double no touches. For barrier option pricing (RKO), etc, all 4 models give ...
April 17th, 2009, 5:59 pm
Forum: Technical Forum
Topic: silly question on N(d2)
Replies: 6
Views: 41011

### silly question on N(d2)

This probably belongs in student section, but the reason is because S is lognormal and not normal. As vol increases the bulk of distribution get shift lower and at infinite basically entire distribution is at 0.
April 1st, 2009, 10:23 pm
Forum: Technical Forum
Topic: Timer options
Replies: 29
Views: 52053

### Timer options

<t>Not necessarily bigger than plain all I'm saying is gamma risk is the biggest risk of this product and what makes most sell side reluctant to sell this thing at reasonable price. If no jumps, the price is more or less BlackScholes(var target,S).Also the holder of this option is short put option o...
March 27th, 2009, 1:04 pm
Forum: Technical Forum
Topic: Timer options
Replies: 29
Views: 52053

### Timer options

Biggest risk of these product is daily jump risk because var is observed close to close, if a stock price gets half intraday or gets taken out at double the price, that will lead to massive loss to timer seller. Question is how do you hedge and price this risk.
March 26th, 2009, 3:24 pm
Forum: Technical Forum
Topic: How does Renaissance Technologies invest?
Replies: 20
Views: 62045

### How does Renaissance Technologies invest?

<t>Medallian Fund has been up like 35% each year after fees over last 20 years with almost no down years (if at all). I'd trust their returns, also they are so secretive and almost noone there ever leaves and they only hire exclusively people with no wall street background noone has a clue what they...
March 23rd, 2009, 1:21 pm
Forum: Numerical Methods Forum
Replies: 1
Views: 44236