Hedging at the university campus under ideal conditions, or in practice?You can use any model or formula you like. The question is whether there is any rigorous (ish) justification. There’s usually a stage in the modeling involving hedging. If you can’t use that then your foundations are weak.
What d(isplacement)? Any number? Taken out of your or your colleague's arse?add a displacement (assuming S + d is log normally distributed) and re-calibrate your smile parameters
So they way it works is say you have 2 different oil market locations. Spot1 is $55 and Spot2 is $50. Right now we have a -$5 basis differential and I bought a put or call option with a (negative)$5 strike on the basis diff. As long as both prices stay negative the model is fine but if your basis flips to positive, Spot 1 is less than Spot2 now, it doesn't. UPDATE: I can work around this, but it's tedious, I was wondering if there is already a unified model for this scenario.What d(isplacement)? Any number? Taken out of your or your colleague's arse?add a displacement (assuming S + d is log normally distributed) and re-calibrate your smile parameters
I'm not sure which language in Google Translate I'm supposed to use to understand what "a negative strike price as it relates to, a basis of, underlying" means. If the negative values are rubbish, why not skip them? If not rubbish, e.g. a difference of two prices, k1-k2? - why not model k1/k2?
Wow, someone's talking about finance on Wilmott Forum...
So they way it works is say you have 2 different oil market locations. Spot1 is $55 and Spot2 is $50. Right now we have a -$5 basis differential and I bought a put or call option with a (negative)$5 strike on the basis diff. As long as both prices stay negative the model is fine but if your basis flips to positive, Spot 1 is less than Spot2 now, it doesn't. UPDATE: I can work around this, but it's tedious, I was wondering if there is already a unified model for this scenario.