<t>What is the difference between the work of IPV/Valuation teams and Model Validation? My understanding is that IPV teams mostly replicate the front office models, check their assumptions and limitations, the derivation of any equations used for pricing (unless the model is a mainstream one), the a...

How do banks normally price FX forward contracts against relatively illiquid currencies, for which covered interest rate parity may not necessarily hold?

From a purely theoretical point of view, is the dividend yield needed when pricing options on an index (e.g. FTSE or DAX) using the Black-Scholes model, or can it be assumed to be zero, since the underlying is a growth index which doesn't pay any dividends?

What is the difference between fitting the parameters of a model to option market prices (e.g. by a least squares minimization) and "fitting the smile"? What does this expression mean?

<t>Thanks, but is it really possible to get reliable barrier option data from Bloomberg? I understand that most barrier options (in fact most FX options in general) are OTC, so I wonder if they really are available on Bloomberg, or if it's only possible to get them from a more specialised data provi...

<t>I am writing some code to price and hedge barrier options using various approaches. Now I would like to test my code using real market data. I have access to Bloomberg at work, but I'm not an expert in using it. How can I get data from Bloomberg on liquid barrier options? I am interested in singl...

<t>But if they have the same order of weak convergence, why would Euler be any slower than Milstein?! In chapter 3 of "Tools for Computational Finance" Rüdiger Seydel looks at the convergence rate for the Monte Carlo pricing of a European option by simulating the processHe concludes that "applying t...

<t>Are there any advantages in using a Milstein scheme vs an Euler one when calculating option prices via Monte Carlo? My understanding is that both are weakly convergent with order 1 (i.e. the sequence of expectations converges with order 1). Since to price an option you need to calculate an expect...

<t>How does one price a "cancellable swap", i.e. an ordinary swap in which one party has a Bermuda-style option to terminate the deal at mark-to-market? I have heard that if the termination is at mark-to-market this feature does not affect the PV of the swap and can effectively be ignored in pricing...

How is it possible for a random variable to have almost everywhere but to also have I found this claim in a book. The way I understand it, if the first condition is satisfied then X is finite everywhere outside of a set of measure zero. So how can the expectation diverge?

<t>I have a very simple question about forward rates. Suppose I have the following continuously compounded spot rates:Year 1: 0.04Year 2: 0.04Year 3: 0.08From this, I calculate the following term structure of 1-year forward rates:1Y FR now: 0.041Y FR at year 1: 0.041Y FR at year 2: 0.16I now want to...

<t>In a book I am reading, a stochastic process is defined as a mapping (where is a probability space, T is an interval on the real line and R is the real line) such that for every t, the mapping is measurable. For each fixed the mapping is called a sample path.I can't reconcile this with the defini...

<t>If you want to price an option using a binomial or trinomial method, is there a way to determine in advance the optimal number of steps for a given accuracy? How does one normally choose the number of steps when implementing these methods in practice?Another question about convergence: do these m...