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by mj
May 6th, 2002, 9:13 am
Forum: Technical Forum
Topic: SDE for a future
Replies: 13
Views: 190854

SDE for a future

<t>Ok I've never actually read Black's 76 paper but here are some thoughts.In the risk-neutral measure the discounted price processes of all tradable assets are martingales. In practical terms, this means that if A_t is a tradable asset then e^{-rt}A_t has zero drift. How we did the drift transforma...
by mj
May 5th, 2002, 8:24 am
Forum: Technical Forum
Topic: SDE for a future
Replies: 13
Views: 190854

SDE for a future

<t>Hmm I think there are at least 3 concepts being confused on this thread.Futures contract.Forward contract.Forward price.Futures contract is resettled daily and is always of zero value so the SDE is rather trivial!The forward price is related to the spot price by a simple relationship F_t = e^{r(T...
by mj
February 13th, 2002, 2:17 pm
Forum: Technical Forum
Topic: transaction costs and rational bounds
Replies: 4
Views: 189436

transaction costs and rational bounds

So basically the bounds are not generally violated but if one stressed the model they might be.


by mj
February 8th, 2002, 2:27 pm
Forum: Technical Forum
Topic: transaction costs and rational bounds
Replies: 4
Views: 189436

transaction costs and rational bounds

<t>Yes I mean that kind of thing. More generally if the pay-off is less than<br/> <br/> aS + b <br/> <br/> then the price must be less than aS_0 + b B_0 where S_0 is the stock price today and B_0 is the discount factor for the expiry time. Ok, in a transaction costs world you have to add a little on...
by mj
January 28th, 2002, 8:33 am
Forum: Technical Forum
Topic: transaction costs and rational bounds
Replies: 4
Views: 189436

transaction costs and rational bounds

<t>I am interested in whether Paul's model for transaction costs is guaranteed to produce a price that is within rational bounds for any choice of pay-off function. If it is, how does one prove this?<br/> <br/> It seems to me that the local variance minimization strategy could be suboptimal in certa...
by mj
January 23rd, 2002, 4:10 pm
Forum: Technical Forum
Topic: Quanto Basket Effect!
Replies: 1
Views: 189467

Quanto Basket Effect!

<t>Well how are you modelling the basket and what currency is the pay-off in?<br/> <br/> If we model each equity as a geometric Brownian motion and correlate the Brownian motions, then the drift of each stock will be the drift you would get if you were pricing a quanto on that stock with pay-off in ...
by mj
January 2nd, 2002, 11:20 am
Forum: Technical Forum
Topic: Option pricing with transaction cost
Replies: 13
Views: 190591

Option pricing with transaction cost

<t>I think it comes down to the nature of the market. If you are a market maker with reasonably balanced positions then a lot of the hedges will cancel out and you will use the zero transaction cost price. If you are selling exotic derivatives in a one-sided market, you will charge more than the cos...
by mj
January 1st, 2002, 11:12 am
Forum: Technical Forum
Topic: Option pricing with transaction cost
Replies: 13
Views: 190591

Option pricing with transaction cost

One reason I think people tend not to worry too much about transaction costs is that they can only ever widen the band of non-arbitrageable prices. If a price is non-arbitrageable in the transaction costs free world it will still be non-arbitrageable in the transaction costs world.
by mj
December 28th, 2001, 8:17 pm
Forum: Technical Forum
Topic: Brownian Bridges in MC?
Replies: 19
Views: 193368

Brownian Bridges in MC?

Here's a simple introduction for the topic for those cant wait for Peter's book to come out.
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