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October 30th, 2020, 11:20 am
Forum: General Forum
Topic: Valuation of put with reflecting barrier
Replies: 50
Views: 4698

Re: Valuation of put with reflecting barrier

October 20th, 2020, 4:21 pm
Forum: General Forum
Topic: sigma root (T-t)
Replies: 86
Views: 6344

Re: sigma root (T-t)

I brought a more formal approach to modeling options when I joined a trading desk in the early 90’s, but the old school guys I sat with were fond of using analogies to explain certain facets of option trading. The analogy they used for the sigma root T term was as follows. To compute bond accrued in...
October 14th, 2020, 10:43 pm
Forum: General Forum
Topic: sigma root (T-t)
Replies: 86
Views: 6344

Re: sigma root (T-t)

https://quant.stackexchange.com/questio ... ot-of-time

They characterize the square root of time rule as a property of geometric Brownian motion. How well it applies to the real world is another story.
October 14th, 2020, 10:26 pm
Forum: General Forum
Topic: sigma root (T-t)
Replies: 86
Views: 6344

Re: sigma root (T-t)

People have also wondered about the propriety of a similar time scaling technique in the VaR world, namely, scaling VaR calculations made with daily data to longer time intervals (sometimes 10 days is used). This is a very similar problem to the one you posed, and it has been discussed a fair bit in...
October 14th, 2020, 2:37 pm
Forum: General Forum
Topic: sigma root (T-t)
Replies: 86
Views: 6344

Re: sigma root (T-t)

Get thee any introductory text on derivatives. Kindergarten level questions should please be posted in the Student Forum.
October 5th, 2020, 3:43 am
Forum: Numerical Methods Forum
Topic: What are the boundary conditions for the Forward contract PDE?
Replies: 45
Views: 4538

Re: What are the boundary conditions for the Forward contract PDE?

Maturity date boundary condition: Suppose you are long a forward contract obliging you to buy the underlying at price \$X at some specified maturity T.   If the underlying price, S, is strictly non-negative, then the payoff at T is Max[S – X, -X]. Since by assumption the underlying has a minimum pric...
October 4th, 2020, 10:13 pm
Forum: Numerical Methods Forum
Topic: What are the boundary conditions for the Forward contract PDE?
Replies: 45
Views: 4538

Re: What are the boundary conditions for the Forward contract PDE?

The intent of pointing out the delta 1 thing was to suggest that the boundary conditions for the forward should be quite similar to the that of the spot. BTW are there any embedded deliver options?
October 4th, 2020, 3:38 am
Forum: Numerical Methods Forum
Topic: What are the boundary conditions for the Forward contract PDE?
Replies: 45
Views: 4538

Re: What are the boundary conditions for the Forward contract PDE?

I'll try to be less cryptic. Why price a simple forward contract in such a complicated fashion when no-arbitrage considerations relative to the underlying prices make delta 1 product valuation nearly trivial.
October 4th, 2020, 3:33 am
Forum: Numerical Methods Forum
Topic: What are the boundary conditions for the Forward contract PDE?
Replies: 45
Views: 4538

Re: What are the boundary conditions for the Forward contract PDE?

Um… forwards are delta 1 products, right? They move more or less dollar for dollar with the underlying. They can have positive or negative market values. Is this triggering any insight?
August 23rd, 2020, 7:47 pm
Forum: General Forum
Topic: Odd result
Replies: 26
Views: 2406

Re: Odd result

I could see a 'correct' model producing garbage output when supplied with garbage input. Good argument validation would take care of that particular one. Anyway, the result with the negative of the put price emerging from a BS call formula supplied with a negative vol is in a paper by Rolf Poulsen f...
August 21st, 2020, 5:17 pm
Forum: General Forum
Topic: Odd result
Replies: 26
Views: 2406

Re: Odd result

Lots of unusual results have been derived. For example, if you put a negative vol into the BS call price formula you get the negative of the put price.
August 17th, 2020, 2:47 pm
Forum: General Forum
Topic: VaR for a life insurance company
Replies: 10
Views: 1741

Re: VaR for a life insurance company

complyorexplain, Thank you for that. As worrying as it is fascinating, A way's back, one of Canada's larger insurers got a bit shaky trying (or not, as the case might have been) to hedge such complicated products. The regulator's response at the time was to lower the capital bar for the sector and t...
August 16th, 2020, 2:53 pm
Forum: General Forum
Topic: Correlation of A-B and C-D kind of assets
Replies: 2
Views: 1065

Re: Correlation of A-B and C-D kind of assets

As for the difference in magnitude between the prices, convert the price series into rate of return series  - where rate of return is defined as ln(Pt/Pt-1) and  ln() is the natural log operator - and compute the correlation on the rates of return instead of the prices.

Stats 101.
July 24th, 2020, 5:56 pm
Forum: General Forum
Topic: VaR for a life insurance company
Replies: 10
Views: 1741

Re: VaR for a life insurance company

complyorexplain - I'd appreciate more insight into the insurance mindset.  A few years ago, a Canadian bank failed miserably offering a deposit note that emulated a common insurance company product. The bank priced the note as they intended to replicate/hedge it, and the resulting pricing wasn't att...
July 9th, 2020, 7:08 pm
Forum: Economics Forum
Topic: Absense of data is creating markets in 'suspended animation'
Replies: 4
Views: 2817

Re: Absense of data is creating markets in 'suspended animation'

Had a really bad quarter, eh? Seriously though, the world is awash in data and I cannot see that as the problem. What we are seeing is more likely irrational exuberance conditioned by the past successes of the Republicans at stealing elections.