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by DavidJN
February 13th, 2021, 7:06 pm
Forum: Student Forum
Topic: Rates dynamics models used by banks for pricing and risk management
Replies: 5
Views: 546

Re: Rates dynamics models used by banks for pricing and risk management

There is definitely more activity in modeling equity options than rates in recent years.  The presence of more substitutes in the rates world (simple examples - a bond can be viewed as a whole instrument or a collection of strip coupons plus the residual, and similar decompositions for caps/caplets ...
by DavidJN
February 3rd, 2021, 7:37 pm
Forum: Technical Forum
Topic: American options with two free boundaries
Replies: 46
Views: 2942

Re: American options with two free boundaries

"This is depressing".

Using a hammer to swat a fly that was killed long ago.
by DavidJN
February 3rd, 2021, 7:34 pm
Forum: General Forum
Topic: Calibration Errors
Replies: 7
Views: 821

Re: Calibration Errors

As unintuitive as it sounds, one does not calibrate to the entire vol surface. That likely explains a good part of your fitting errors. Instead, one chooses the parts of the vol surface that logically span the particular deal you are pricing. And as unintuitive as it also sounds, this means one reca...
by DavidJN
February 1st, 2021, 11:16 pm
Forum: General Forum
Topic: Calibration Errors
Replies: 7
Views: 821

Re: Calibration Errors

Not meaning to put words in bearish's mouth, but the fitting errors you are showing are simply way too large to be useful in pricing. You would get your face ripped off if you tried trading and hedging with such poor fitting. There are a number of possibilities as to why your fit is so poor: 1) as b...
by DavidJN
January 30th, 2021, 11:24 pm
Forum: Student Forum
Topic: Options trading models used in practice
Replies: 1
Views: 629

Re: Options trading models used in practice

Almost everyone in the industry who is not a price taker will use some kind of stochastic volatility model. As for limit structures, the most useful ones are limits on the Greeks, but due to regulatory fixation with VaR, that kind of limit has become fairly binding. Other useful limits are on strike...
by DavidJN
January 29th, 2021, 5:11 pm
Forum: Trading Forum
Topic: The Long and the Short of It
Replies: 16
Views: 1487

Re: The Long and the Short of It

At the risk of sounding a bit trite, I am reminded of a quote attributed to Keynes that goes something like... the market may remain irrational longer than you may remain solvent.

Good point, Alan, any company should issue when its shares are plainly overbought. 
by DavidJN
January 29th, 2021, 5:01 pm
Forum: Technical Forum
Topic: American options with two free boundaries
Replies: 46
Views: 2942

Re: American options with two free boundaries

"... you are holding the land with a right to build property on the land or to abandon the land.  " By abandon, do you mean sell it? No residual value? Years ago I spent a fascinating afternoon visiting Goldman Sachs in Calgary, Canada. Goldman is deeply engaged in the integrated energy bu...
by DavidJN
December 7th, 2020, 3:29 pm
Forum: General Forum
Topic: Hypothetical Portfolio Exercises
Replies: 2
Views: 858

Re: Hypothetical Portfolio Exercises

The HPEs are used to, among other things, inform regulators about marked inconsistencies in the treatment of RWAs across firms. As a practical matter, the major impediments to publishing the details of HPEs are the restrictions the data vendors have placed on the use of such data. Redistribution is ...
by DavidJN
December 1st, 2020, 4:21 pm
Forum: Technical Forum
Topic: Converting a swap spread to a different day count
Replies: 1
Views: 919

Re: Converting a swap spread to a different day count

Yes, that is the procedure, for those who might want to know
by DavidJN
November 30th, 2020, 6:33 pm
Forum: Technical Forum
Topic: Converting a swap spread to a different day count
Replies: 1
Views: 919

Converting a swap spread to a different day count

I have an applied question for any swap traders out there. Scientists are please encouraged to not hijack the thread.    Say you have a bespoke single currency interest rate swap that pays X BPS on the fixed side semi-annual 30/360, against 3M LIBOR plus a Y BPS spread act/360 on the floating side. ...
by DavidJN
November 12th, 2020, 2:11 pm
Forum: Careers Forum
Topic: Moving to the buy side
Replies: 4
Views: 1120

Re: Moving to the buy side

I would imagine the money is less. And you'd have to work among people who have dated and even incorrect ideas about pricing (I am thinking specifically of insurance here). Trying to change that mindset is a steep hill to climb. Good luck. 
by DavidJN
October 20th, 2020, 4:21 pm
Forum: General Forum
Topic: sigma root (T-t)
Replies: 86
Views: 5726

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: 5726

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: 5726

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...