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by DavidJN
October 20th, 2020, 4:21 pm
Forum: General Forum
Topic: sigma root (T-t)
Replies: 86
Views: 2696

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...
by DavidJN
October 14th, 2020, 10:43 pm
Forum: General Forum
Topic: sigma root (T-t)
Replies: 86
Views: 2696

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.
by DavidJN
October 14th, 2020, 10:26 pm
Forum: General Forum
Topic: sigma root (T-t)
Replies: 86
Views: 2696

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...
by DavidJN
October 14th, 2020, 2:37 pm
Forum: General Forum
Topic: sigma root (T-t)
Replies: 86
Views: 2696

Re: sigma root (T-t)

Get thee any introductory text on derivatives. Kindergarten level questions should please be posted in the Student Forum.
by DavidJN
October 5th, 2020, 3:43 am
Forum: Numerical Methods Forum
Topic: What are the boundary conditions for the Forward contract PDE?
Replies: 45
Views: 1185

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...
by DavidJN
October 4th, 2020, 10:13 pm
Forum: Numerical Methods Forum
Topic: What are the boundary conditions for the Forward contract PDE?
Replies: 45
Views: 1185

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? 
by DavidJN
October 4th, 2020, 3:38 am
Forum: Numerical Methods Forum
Topic: What are the boundary conditions for the Forward contract PDE?
Replies: 45
Views: 1185

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.  
by DavidJN
October 4th, 2020, 3:33 am
Forum: Numerical Methods Forum
Topic: What are the boundary conditions for the Forward contract PDE?
Replies: 45
Views: 1185

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? 
by DavidJN
August 23rd, 2020, 7:47 pm
Forum: General Forum
Topic: Odd result
Replies: 26
Views: 1087

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...
by DavidJN
August 21st, 2020, 5:17 pm
Forum: General Forum
Topic: Odd result
Replies: 26
Views: 1087

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.
by DavidJN
August 17th, 2020, 2:47 pm
Forum: General Forum
Topic: VaR for a life insurance company
Replies: 10
Views: 865

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...
by DavidJN
August 16th, 2020, 2:53 pm
Forum: General Forum
Topic: Correlation of A-B and C-D kind of assets
Replies: 2
Views: 495

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. 
by DavidJN
July 24th, 2020, 5:56 pm
Forum: General Forum
Topic: VaR for a life insurance company
Replies: 10
Views: 865

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...
by DavidJN
July 9th, 2020, 7:08 pm
Forum: Economics Forum
Topic: Absense of data is creating markets in 'suspended animation'
Replies: 4
Views: 1731

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.
by DavidJN
July 7th, 2020, 3:22 am
Forum: General Forum
Topic: Hull White Simulation
Replies: 2
Views: 1326

Re: Hull White Simulation

In the 1-factor HW model, the idea is to simulate the short rate path and use the analytic equations to generate the discount bond prices and such given the short rate, vol, and mean reversion.  

Are you doing this primarily for pricing or exposure measurement purposes? 
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