Re the topic of this FAQ, I have heard:"Risk Neutral pricing underprice options because risk free rate is definitely lower than expected returns.""The BS formula and the dynamic hedging ensures that at every moment your portfolio has no risk"

<t>Hi,In general, if I need to use swaption volatilities for calibration of an interest rate model, and my yield curves are bootstrapped using the most liquid swap rates, which, in AUD case would be BBSW3M vs. Fixed, I believe it is best to preserve the consistency at least in the underlying swap wh...

<t>Hi,Does anybody know what is the underlying AUD swap of a AUD swaption on Bloomberg? The AUD swap rates on Bloomberg for 1-3 years are quoted quarterly with actual/365 daycount convention, while the 4-30 years are quoted semi-annually. In the market, the most liquid 1Y AUD swap has fixed quarterl...

<t>Hi,If I wrote an option on an equity index and I delta-hedge using futures, but the changes in the futures prices are very different from the changes in the spot prices day over day (ie. delta of spot vs. futures is not close to 1) which gives me basis risks.1) How does this impact the daily P&am...

It's alright if the time series is long enough.

<t>I have read numerous articles on hedging and risk management that says one should use real-world evolution to evaluate hedge effectiveness of minimum guaranteed insurance contracts, which is essentially a put option sold to policyholders. If the pricing of the premium is based on risk-neutral pri...

<t>Hi,Suppose I have sold an put option on a basket of stocks that listed on different indices, but very illiquid.Assume that I am able to replicate an underlying basket returns via robust regression using several risk factors such as returns on the equity futures on the different indices. Is there ...

Terms to look out for: cointegration, commodity prices (ie. Jump processes) and China.

<t>Hi,Suppose I have sold an option on a basket of stocks listed on different indices.Assume that I am able to replicate an underlying basket return via robust regression using several risk factors such as returns on the equity futures on the different indices. Is there a direct linkage between the ...

For Quant Finance purposes though, such as visualizing the greeks of an exotic option that has no analytic solution available, how does Mathematica compares to Matlab in terms of:- speed?- learning curve for a non C++ programmer?

Hi Aaron,Would you please kindly elaborate on why you do not recommend this method?Thanks,J

<t>Hi,Which Capital Market, do you think, will employ more people in the various areas such as Trade Execution, Sales, Middle office and Research for the next 5 years? By geographic location, the equity and equity derivatives markets are booming in Asia in all areas. Credit seems to be mainly from L...

They almost NEVER reply! Unless you actually talk to someone of authority (NOT HR) during a career conference, otherwise I found applying online to US IB just a waste of time. I got replies and talked to real people from some banks based in London tho.

Are you referring to the shares traded in China? I think I have read about them on the Far East Economic Review. Try to look up for the proper definition there.

<t>The factor-based Portfolio Expected Risks:C = X*F*X' + Ewhere C is an nxn matrix of asset return covariances, F is an mxm matrix of factor return covariances, X is nxm matrix of of factor loadings and E is nxn matrix of the specific return convariances. Consider m << n.I am trying to create chara...