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by alvinkam
June 3rd, 2010, 4:14 am
Forum: Technical Forum
Topic: Does local vol model overprices heston model ?
Replies: 11
Views: 35282

Does local vol model overprices heston model ?

You can always perform a Monte Carlo simulation of the local vol model. I think that's the standard way of testing if a model's dynamics are realistic.
by alvinkam
May 27th, 2010, 7:38 am
Forum: Technical Forum
Topic: Does local vol model overprices heston model ?
Replies: 11
Views: 35282

Does local vol model overprices heston model ?

Try using the local vol model to price a forward starting option, invert the price to get the implied Black vol surface. Repeat for different strikes, expiries, forward starting points. You will see why the predicted future vol surface is not believable.
by alvinkam
February 25th, 2010, 10:01 am
Forum: Trading Forum
Topic: Options on Variance
Replies: 4
Views: 39213

Options on Variance

Unless I am mistaken, the question is relating to writing options on variance (i.e. at a particular maturity and variance strike), rather than just swaps. This is quite exotic and you would hard pressed to find a trading desk that readily gives you two-way prices on these.
by alvinkam
February 25th, 2010, 9:51 am
Forum: General Forum
Topic: Vega and Heston Monte Carlo
Replies: 7
Views: 35087

Vega and Heston Monte Carlo

<t>This is pretty standard. You first determine your Heston vega, i.e. the change in PV by bumping each single Heston param in turn and re-evaluating your trade. Through your calibration closed form formula you should also have a matrix relating the Heston params to the market implied vol surface. W...
by alvinkam
September 9th, 2009, 1:59 pm
Forum: Student Forum
Topic: LME 3M Date
Replies: 5
Views: 39733

LME 3M Date

From trade date, add 3 months, then minus 2 business days.
by alvinkam
September 9th, 2009, 1:44 pm
Forum: Technical Forum
Topic: Libor discount curve construction
Replies: 10
Views: 45386

Libor discount curve construction

For this case, your firm's history is a good teacher. And typically cubic spline interpolation is needed to reduce the effect of the kink at the point where the futures meet the swaps. After all is done, always plot the implied forward curve to check if anything seems badly wrong.
by alvinkam
September 6th, 2009, 2:31 pm
Forum: Technical Forum
Topic: Delta hedging short dated option with rapid time decay
Replies: 6
Views: 38087

Delta hedging short dated option with rapid time decay

You also experience the same problem with barrier options if the underlying gets near the barrier. I had 'some fun' with exactly this situation involving a large barrier option trade last week.
by alvinkam
September 6th, 2009, 2:20 pm
Forum: Technical Forum
Topic: Hedging the Himalayan or Everest Option
Replies: 2
Views: 36345

Hedging the Himalayan or Everest Option

You don't really have a reasonable semi-static hedge for these, that's why traders typically charge a fat margin related to 'pin risk' before they take on these trades. At least that's what I do.
by alvinkam
September 6th, 2009, 2:15 pm
Forum: Technical Forum
Topic: Forward and Future.
Replies: 5
Views: 36691

Forward and Future.

Wrong! An FRA is a martingale only under its associated T-forward measure. As for why futures are martingales under the risk-neutral measure, think about margining and try figure out its implication.
by alvinkam
September 6th, 2009, 2:04 pm
Forum: Technical Forum
Topic: Correlation Greeks
Replies: 11
Views: 72409

Correlation Greeks

At my place, correl sensitivity is termed just correlation vega, which is probably less likely to be misunderstood compared some other more fancy names.
by alvinkam
August 1st, 2009, 12:10 pm
Forum: General Forum
Topic: pdf extraction from traded options
Replies: 5
Views: 37362

pdf extraction from traded options

That's right, in other words, pdf is proportional to the second derivative of call price with respect to strike. But you only get terminal distributions, nothing about the conditionals from european options.
by alvinkam
May 15th, 2008, 3:30 pm
Forum: Technical Forum
Topic: Commodity Spread Options
Replies: 19
Views: 196117

Commodity Spread Options

Sorry to spoil the party but you are thinking of pricing spark spreads this way then you will be basically screwed. You have to model the spread directly, forget about modeling the underlyings and infering the spread. Won't work. Ask any seasoned pros in the area.
by alvinkam
June 26th, 2007, 9:54 am
Forum: Technical Forum
Topic: Correlation in multi-asset & multi-factor settings
Replies: 2
Views: 70479

Correlation in multi-asset & multi-factor settings

Thanks, was thinking along somewhat similar lines. I guess we can't run away from introducing a few simplying heuristics on cross factor correlations.
by alvinkam
June 22nd, 2007, 5:08 am
Forum: Technical Forum
Topic: Correlation in multi-asset & multi-factor settings
Replies: 2
Views: 70479

Correlation in multi-asset & multi-factor settings

<t>Let's say I am pricing a cross asset hybrid product which is dependent on the CMS spread of a particular currency and a commodity with a futures curve that has a significant probability of moving into contango from its current backwardation condition.Let's assume that I'm using an n-factor intere...
by alvinkam
May 17th, 2007, 3:50 am
Forum: General Forum
Topic: Cuve Fitting for implied volatility curve
Replies: 2
Views: 72189

Cuve Fitting for implied volatility curve

<t>Are you asking for an extrapolation method to get implied vols at extreme strikes? Why? At these strikes I would think that the market dynamics of supply and demand play a far more important role than any number generated by clever models/extrapolation methods. Having said that, take a look at th...