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by figaro
December 22nd, 2005, 8:46 am
Forum: General Forum
Topic: FX settlement rule
Replies: 1
Views: 126864

FX settlement rule

<t>Hi Frederic,I am sure you have the answer by now, but if you haven't:You would hedge the cost of carrying this by entering into a 2-day forward contract, and you would value the payout of your spot transaction relative to the value of the forward. Your argument then just says that Forward/Spot = ...
by figaro
December 20th, 2005, 9:28 pm
Forum: General Forum
Topic: Options on variance swaps
Replies: 7
Views: 127810

Options on variance swaps

I stand corrected. I was actually aware of this one, just never realised it came from Merrill. But to be perfectly honest, cutting edge stuff it ain't...
by figaro
December 20th, 2005, 8:57 pm
Forum: Student Forum
Topic: Hedging with Lèvy processes
Replies: 13
Views: 128959

Hedging with Lèvy processes

<t>So if I am getting this correctly, your question is how to derive the pde for option prices? The original reference for this is the Merton jump model. You can still delta hedge the diffusion part. After that you are left with jump risk, but if you assume that the jumps are uncorrelated to the dif...
by figaro
December 20th, 2005, 2:01 pm
Forum: Student Forum
Topic: Hedging with Lèvy processes
Replies: 13
Views: 128959

Hedging with Lèvy processes

<t>Those of us who have full time jobs don't really post on wilmott every day It seems like you are reading the right papers, it should all be covered there; other papers of interest can be downloaded from Peter Carr's website.The problem with hedging jump processes is that the process may jump to a...
by figaro
December 20th, 2005, 10:55 am
Forum: General Forum
Topic: Bond Options with barrier
Replies: 2
Views: 126634

Bond Options with barrier

Yes.Without skew, you can price them by 'reflecting' options that will make your payoff zero at barrier; see any of the Wilmott books.With skew, you have to do it numerically.Hope this helps.
by figaro
December 19th, 2005, 9:04 pm
Forum: General Forum
Topic: Options on variance swaps
Replies: 7
Views: 127810

Options on variance swaps

<t>No, you didn't miss anything. I guess it is not entirely clear to me what sort of model you are after. There is no model that will take a vanilla skew as input and reproduce a variance skew (realised or implied) as output. Any model that does that, does it by introducing unhedgeable var-vega risk...
by figaro
December 19th, 2005, 5:05 pm
Forum: General Forum
Topic: Options on variance swaps
Replies: 7
Views: 127810

Options on variance swaps

<t>There are many models, but all have model risk - i.e. the price you get depends strongly on what you assume as process for the underlying. See Carr et al on options on variance (google Peter Carr). There is a brief thread in the Technical Forum with a few references.At the end of the day, if you ...
by figaro
December 15th, 2005, 8:34 am
Forum: Technical Forum
Topic: lookback option under deterministic volatility function
Replies: 2
Views: 127659

lookback option under deterministic volatility function

Do a search on "Wiener-Hopf factorization".
by figaro
December 15th, 2005, 8:29 am
Forum: Technical Forum
Topic: Blind pricing
Replies: 3
Views: 127156

Blind pricing

Presumably the stock will be liquid after the ipo so you will still be able to hedge the option? It is just a cliquet then. How do you price a cliquet if you can't hedge vol of vol? Close your eyes, say a quick prayer, pop a random number and charge as much as you can in bid-offer...
by figaro
December 15th, 2005, 8:22 am
Forum: Technical Forum
Topic: Replacement cliquet
Replies: 1
Views: 127831

Replacement cliquet

<t>You *price* it in monte carlo. I'd be surprised if you could find a simple formula. There are some obvious upper and lower bounds though The replacement acts as a cap but it is weaker than the cliquet floors. You are long vega, because as vol goes up negative returns are all floored at 100% and p...
by figaro
December 15th, 2005, 7:58 am
Forum: Technical Forum
Topic: Options on variance swaps
Replies: 7
Views: 137843

Options on variance swaps

Carr et al just confirm that options on realised variance can not be replicated by european payoffs. They still go on to price them using various models, but there is too much model risk for it to be useful in practice.
by figaro
December 1st, 2005, 8:00 pm
Forum: Technical Forum
Topic: Himalayans and skew
Replies: 3
Views: 128964

Himalayans and skew

<t>In two words: for the first year, you are writing a call on the best performer which is priced off the spot skew.for second and third year, you are writing cliquet calls on the best performers which are priced off the respective forward skews.In three more words:vol goes up => best performer gets...
by figaro
November 26th, 2005, 9:39 pm
Forum: Careers Forum
Topic: GMAG
Replies: 4
Views: 129699

GMAG

Becaus, of course, it makes perfect sense to waste time & money on interviewing people when they have no intention to hire....
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