Quantitative Finance Stack Exchange
Quantitative Finance Stack Exchange

Questions tagged [derivatives]

A financial contract whose payoff is linked to the evolution of an underlying security.

554 questions
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Quantitative Derivatives Trading vs. Time

Most quantitative investment strategies focus on the changing prices of a commodity or equity over time. Derivatives, however, make this more complicated. How can I apply quantitative strategies to something that is not a single product with a…
Matt Bell
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Why Must Dividends Be Reinvested to Use Risk-Neutral Pricing?

Assume the price of a stock $S_t$ paying continuous dividend $a$ satisfies $$ dS_t = S_t\left((\mu - a)dt + \sigma dW_t\right). $$ The risk-neutral pricing formula states that if $\mathbb{Q}$ is any probability measure such that $e^{-rt}S_t$ is a…
bcf
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Are there financial instruments that make a bet on traded volume instead of price or its derivatives?

For most financial instruments we can go long or short and make a bet on the price. In the case of options we can bet on derivatives of price and other factors (e.g., interest rates). Is there an instrument or a strategy that can benefit from…
icequations
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What is meant by the funding cost of a derivative?

Numerous sources refer to the 'funding cost' of a derivative. I'm confused as to exactly what cost is being referred to here. To illustrate my confusion, consider purchasing an uncollateralised OTC gold forward at market (with value of 0). I have…
Trent Di
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Predicting Implied Volatility from current and historical volatility

Options implied volatility (IV) and skew can be calculated using the current option prices. I ask to what extent those observed variables are expected to deviate from the "expected" or predicted values for those parameters. Specifically, it is…
d_e
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Name for option valued by a time difference

Is there a name for an option whose value is determined by a time difference? I mean a derivative whose contract reads something like, "If stock $X$ goes below $Y$ at time $T_1$, and $T_1$ is before $T_0$, pay out $c\times(T_0-T_1)$". The exposure…
Volume Man
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What is the difference between funded and unfunded derivative?

What is the difference between funded and unfunded derivative? Can anyone explain the difference between these two?
lakshmen
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Derivatives of derivatives

Has financial derivatives of financial derivatives ever been considered in academic or practical settings? Is it useless/useful? Say $C(S_t;K,T)$ is a European call on an underlying $S_t$ with strike $K$ and expiry $T$. Then what is the no-arbitrage…
Who cares
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Trying to understand brazil derivatives market

I am trying to get a better understanding of brazil's market, specially derivs. I know they have certain instruments such as "Convertibility" (based on the yields spread between onshore and offshore) and few other things such as "Cupom Cambial". I…
F0l0w
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Which of the following derivatives are protected from arbitrary corporate action?

Practically speaking, are individual stock futures/options and Index futures/ (options on futures) protected from arbitrary company action? Say, in the extreme, all companies suddenly pays huge dividend (99%) or split stocks like crazy (1 to 100)? I…
user40780
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uncollateralised otc derivatives and bank funding costs

I've read multiple references that imply that the valuation of OTC derivatives being related to bank funding cost. Given that an uncollateralised OTC derivative needs no funding from the bank's treasury - no cash is required to maintain the position…
Trent Di
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The dice game and derivatives trading

I happened to a interview question: Give a equal dice, you will gain the money which is the number you roll, then how much will you pay for the game. Naturely, the answer is 3.5. But the interview said, the dice game is not the derivatives, you have…
A.Oreo
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at-the-money short term straddle and the implied vol

Here is a passage from "Advanced Equity Derivatives: Volatility and Correlation" by Sebastien Bossu, Wiley (2014). We see the prox $\beta_0,$ it seems to use the approximation that the at-the-money short term straddle is same as the implied vol? But…
A.Oreo
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Factors that make sell-side valuations of equity derivatives differ

If I ask a sell-side desk "A" for a "valuation" of a relatively simple OTC product (equity derivative, or 1st generation equity exotic), what are the reasons/main reason why a different sell-side desk "B" (at some other bank) would arrive at a…
LaplaceKis
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Beginner question about basis risk

new to the area, and had a question about basis risk. If I entered into a receive fixed pay 1mo Libor swap, why is it good for me if the 1x3 month Libor widens and bad for me when it tightens. Also if I am OIS discounting, why is it good for me if…
Derivnoob
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