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MaxwellSheffield
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Posts: 70
Joined: December 17th, 2013, 11:08 pm

Re: How would you price American options?

July 2nd, 2018, 1:57 pm

@frolloos It is true that I am aggressive in my answers to that person only , the reasons is that it is not his first attempt, take a look at his other answers, and how condescending he is. In this forum, we can see very good quality posts from guys who never behave like him. 
Is he acting that way to fill in the gaps in his knowledge ? Yes he can impress graduate students, with the big words in his 2-word answers, but he must keep in mind that we are not all newbies, and I could tell just by reading his answers that he is a fraud. I already explained why in that particular question.


True, we are all one-liners when the question is relatively obvious as we expect the OP to finish the job, but in his case, how can you finish the job when his words are crap but the guy does not even try to understand or even ask clarifications? I am honestly fine with cockiness if the guy actually delivers 

Back to the subject, rate practitioners would have pinpoint right away the legitimacy of my question. In the short-term rate market, rate vols are usually extracted from Eurodollar options. The issue is that  Eurodollar options are American but not margined (@frolloos, that is why the opengamma paper is not practical, true that in the case of a margined options, there is no funding, hence no american features), therefore, if one uses SABR+Black/Bachelier, and price Eurodollar options as Europeans, the model parameters will capture more vols than it is supposed to do. Worse, the lending/funding rate may have an impact on your exercise decision as @agnoatto mentioned.

Now, with what I have said how can someone take a guy seriously when he says "Dupire callibrated to Europeans"  then "As far as I know models should be calibrated." So again, move away. 
 
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frolloos
Posts: 1581
Joined: September 27th, 2007, 5:29 pm
Location: Netherlands

Re: How would you price American options?

July 2nd, 2018, 2:26 pm

Fair enough MaxwellSheffield - I am by no means a rates expert so unfortunately cannot help you here, hopefully other forum members can.
 
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gatarek
Posts: 341
Joined: July 14th, 2002, 3:00 am

Re: How would you price American options?

July 2nd, 2018, 3:38 pm

.
Last edited by gatarek on March 11th, 2019, 3:00 pm, edited 1 time in total.
 
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MaxwellSheffield
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Posts: 70
Joined: December 17th, 2013, 11:08 pm

Re: How would you price American options?

July 2nd, 2018, 4:35 pm

hopefully other forum members can.
The question is - would they want to.
I would rather have someone who reads my post , and just ignores it because he/she believes I am an ass*****, than having this guy polluting my post and others without exposing him. 
 
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Cuchulainn
Posts: 60518
Joined: July 16th, 2004, 7:38 am
Location: Amsterdam
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Re: How would you price American options?

July 2nd, 2018, 8:11 pm

hopefully other forum members can.
The question is - would they want to.
I would rather have someone who reads my post , and just ignores it because he/she believes I am an ass*****, than having this guy polluting my post and others without exposing him. 
I agree. Many of my posts have been ruined by those telling me what I should and should not be doing. 

Or when you start a post it ends up about IEEE 754 or that mathematics is a figment of mathematician's minds.

Many bros have stopped posting (long time ago) because the noise levels even after a couple of posts. Nobody (almost) can discuss a topic to completion.

On the other hand, Paul allows people to behave in a free and responsible way. And that is fairly unique as forums go. 
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Martinghoul
Posts: 3255
Joined: July 18th, 2006, 5:49 am

Re: How would you price American options?

July 2nd, 2018, 9:12 pm

@frolloos It is true that I am aggressive in my answers to that person only , the reasons is that it is not his first attempt, take a look at his other answers, and how condescending he is. In this forum, we can see very good quality posts from guys who never behave like him. 
Is he acting that way to fill in the gaps in his knowledge ? Yes he can impress graduate students, with the big words in his 2-word answers, but he must keep in mind that we are not all newbies, and I could tell just by reading his answers that he is a fraud. I already explained why in that particular question.


True, we are all one-liners when the question is relatively obvious as we expect the OP to finish the job, but in his case, how can you finish the job when his words are crap but the guy does not even try to understand or even ask clarifications? I am honestly fine with cockiness if the guy actually delivers 

Back to the subject, rate practitioners would have pinpoint right away the legitimacy of my question. In the short-term rate market, rate vols are usually extracted from Eurodollar options. The issue is that  Eurodollar options are American but not margined (@frolloos, that is why the opengamma paper is not practical, true that in the case of a margined options, there is no funding, hence no american features), therefore, if one uses SABR+Black/Bachelier, and price Eurodollar options as Europeans, the model parameters will capture more vols than it is supposed to do. Worse, the lending/funding rate may have an impact on your exercise decision as @agnoatto mentioned.

Now, with what I have said how can someone take a guy seriously when he says "Dupire callibrated to Europeans"  then "As far as I know models should be calibrated." So again, move away. 
What's your purpose in getting the pricing correct?  As far as I am aware, the overwhelming majority of practitioners price Eurodollar listed options as European, in spite of them being technically American and the occasional implication thereof.  Personally, in my whole time in the mkt, I have only ever encountered a single case where it mattered and that was a long time ago, in a galaxy far far away.

In general, I suppose I would say that it's one of those things where it's a known fudge, everyone knows as much, but it's good enough for everybody.  I might add, as an aside, that it's not the only such fudge in the world of rates.
 
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MaxwellSheffield
Topic Author
Posts: 70
Joined: December 17th, 2013, 11:08 pm

Re: How would you price American options?

July 3rd, 2018, 1:26 pm

@frolloos It is true that I am aggressive in my answers to that person only , the reasons is that it is not his first attempt, take a look at his other answers, and how condescending he is. In this forum, we can see very good quality posts from guys who never behave like him. 
Is he acting that way to fill in the gaps in his knowledge ? Yes he can impress graduate students, with the big words in his 2-word answers, but he must keep in mind that we are not all newbies, and I could tell just by reading his answers that he is a fraud. I already explained why in that particular question.


True, we are all one-liners when the question is relatively obvious as we expect the OP to finish the job, but in his case, how can you finish the job when his words are crap but the guy does not even try to understand or even ask clarifications? I am honestly fine with cockiness if the guy actually delivers 

Back to the subject, rate practitioners would have pinpoint right away the legitimacy of my question. In the short-term rate market, rate vols are usually extracted from Eurodollar options. The issue is that  Eurodollar options are American but not margined (@frolloos, that is why the opengamma paper is not practical, true that in the case of a margined options, there is no funding, hence no american features), therefore, if one uses SABR+Black/Bachelier, and price Eurodollar options as Europeans, the model parameters will capture more vols than it is supposed to do. Worse, the lending/funding rate may have an impact on your exercise decision as @agnoatto mentioned.

Now, with what I have said how can someone take a guy seriously when he says "Dupire callibrated to Europeans"  then "As far as I know models should be calibrated." So again, move away. 
What's your purpose in getting the pricing correct?  As far as I am aware, the overwhelming majority of practitioners price Eurodollar listed options as European, in spite of them being technically American and the occasional implication thereof.  Personally, in my whole time in the mkt, I have only ever encountered a single case where it mattered and that was a long time ago, in a galaxy far far away.

In general, I suppose I would say that it's one of those things where it's a known fudge, everyone knows as much, but it's good enough for everybody.  I might add, as an aside, that it's not the only such fudge in the world of rates.
For the sake of being "more right", as you said, I have never seen someone pricing a Eurodollar option as American, but one often compares future rate realized dynamics and implied one. Hence, it is natural for me to ask myself : can we do better ? Every time I see a paper mentioning a Eurodollar option, they  assume that "European" is a good proxy without further justifications( Piterbarg, Hagan) , or just disregard it by talking about the margined case ( OpenGamma ). Graeme West (RIP) mentioned it too but South African future options  are margined . On my side, I built a model to compare European vs American, and I can get some differences.  Could you detail that statement "I have only ever encountered a single case where it mattered and that was a long time ago, in a galaxy far far away." ? 
 
User avatar
MaxwellSheffield
Topic Author
Posts: 70
Joined: December 17th, 2013, 11:08 pm

Re: How would you price American options?

July 3rd, 2018, 1:29 pm

The question is - would they want to.
I would rather have someone who reads my post , and just ignores it because he/she believes I am an ass*****, than having this guy polluting my post and others without exposing him. 
I agree. Many of my posts have been ruined by those telling me what I should and should not be doing. 

Or when you start a post it ends up about IEEE 754 or that mathematics is a figment of mathematician's minds.

Many bros have stopped posting (long time ago) because the noise levels even after a couple of posts. Nobody (almost) can discuss a topic to completion.

On the other hand, Paul allows people to behave in a free and responsible way. And that is fairly unique as forums go. 
//
OT is the place where you be as clever and as witty as Oscar Wilde
 "Nobody (almost) can discuss a topic to completion." This...
 
User avatar
Martinghoul
Posts: 3255
Joined: July 18th, 2006, 5:49 am

Re: How would you price American options?

July 3rd, 2018, 8:04 pm

@frolloos It is true that I am aggressive in my answers to that person only , the reasons is that it is not his first attempt, take a look at his other answers, and how condescending he is. In this forum, we can see very good quality posts from guys who never behave like him. 
Is he acting that way to fill in the gaps in his knowledge ? Yes he can impress graduate students, with the big words in his 2-word answers, but he must keep in mind that we are not all newbies, and I could tell just by reading his answers that he is a fraud. I already explained why in that particular question.


True, we are all one-liners when the question is relatively obvious as we expect the OP to finish the job, but in his case, how can you finish the job when his words are crap but the guy does not even try to understand or even ask clarifications? I am honestly fine with cockiness if the guy actually delivers 

Back to the subject, rate practitioners would have pinpoint right away the legitimacy of my question. In the short-term rate market, rate vols are usually extracted from Eurodollar options. The issue is that  Eurodollar options are American but not margined (@frolloos, that is why the opengamma paper is not practical, true that in the case of a margined options, there is no funding, hence no american features), therefore, if one uses SABR+Black/Bachelier, and price Eurodollar options as Europeans, the model parameters will capture more vols than it is supposed to do. Worse, the lending/funding rate may have an impact on your exercise decision as @agnoatto mentioned.

Now, with what I have said how can someone take a guy seriously when he says "Dupire callibrated to Europeans"  then "As far as I know models should be calibrated." So again, move away. 
What's your purpose in getting the pricing correct?  As far as I am aware, the overwhelming majority of practitioners price Eurodollar listed options as European, in spite of them being technically American and the occasional implication thereof.  Personally, in my whole time in the mkt, I have only ever encountered a single case where it mattered and that was a long time ago, in a galaxy far far away.

In general, I suppose I would say that it's one of those things where it's a known fudge, everyone knows as much, but it's good enough for everybody.  I might add, as an aside, that it's not the only such fudge in the world of rates.
For the sake of being "more right", as you said, I have never seen someone pricing a Eurodollar option as American, but one often compares future rate realized dynamics and implied one. Hence, it is natural for me to ask myself : can we do better ? Every time I see a paper mentioning a Eurodollar option, they  assume that "European" is a good proxy without further justifications( Piterbarg, Hagan) , or just disregard it by talking about the margined case ( OpenGamma ). Graeme West (RIP) mentioned it too but South African future options  are margined . On my side, I built a model to compare European vs American, and I can get some differences.  Could you detail that statement "I have only ever encountered a single case where it mattered and that was a long time ago, in a galaxy far far away." ? 
Basically, I am saying that I’ve only encountered a single case where American exercise was relevant and that was in the throes of the crisis, if memory serves.  Back then, all sorts of stuff was going pear-shaped, so it’s kinda hard to know if it’s a particularly interesting example.  In every other case, the European “approximation” seems good enough for pretty much everyone in the mkt.
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