Questions about models for the valuation of option contracts.
Questions tagged [option-pricing]
1827 questions
12
votes
1 answer
How to price a Swing Option?
I'm working in the commodity market and I've to price Swing Options with MATLAB, preferably with finite element.
Has anyone already priced these kind of derivatives?
I'm thinking about using the structure for the pricing of an American Option and…
alberto
- 121
- 3
10
votes
5 answers
Option on a dice game
I am sligtly confused by this problem, although it should not be difficult.
Let us roll a sigle dice. If the dice shows $n$, I receive $n$ dollars. I can buy an option to roll the die again. What is the price for the option?
My idea is that the…
RandomGuy
- 666
- 1
- 10
- 17
7
votes
1 answer
Option pricing with dependent risk factors
I'm a bit stuck with the pricing of an option where the underlying stock is correlated to an additional process.
Setting: Assume that we have a probability space where under $Q$ the dynamics of the stock and an additional process are given by
$$…
Wiles01
- 267
- 1
- 7
7
votes
1 answer
When pricing options, which day counting conventions should be used to calculate time to maturity?
In most option pricing textbooks, time to maturity is given as a convenient figure such as 6 months (T=0,5).
In practice how do you effectively calculate time to maturity given today's date and the expiration date? Knowing that there are about 252…
BigONotation
- 500
- 1
- 6
- 14
6
votes
2 answers
How do you know if if an option is priced correctly?
Besides obvious extreme examples (ie volatility going to infinity, infinite time, zero time, or zero volatility, deep OTM/ITM ) how does one gauge if an option is 'correct' or at least in the ballpark when priced with an option pricing formula?…
April Crenshaw
- 63
- 4
6
votes
3 answers
Longstaff Schwartz method
I try to implemente the LSM method with this algorithm but my price is always too low. By example for an American put option with the following parameters:
S0 = 36, Strike = 40, rate = 6%, T = 1 year, discrete path = 50, volatility = 20%
I got 4…
user595
6
votes
1 answer
Question on an example from "Dynamic Hedging" by Nassim Taleb
So I'm reading through Dynamic Hedging to start trying to learn option theory better. I hit Chapter 8 on Delta and am completely lost on a certain example he gives.
The example is from Page 119 and is labeled "A Misleading Delta" - He posits the…
somethinghere
- 83
- 4
6
votes
6 answers
How can put options be more expensive than call options in an efficient market?
I noticed that for some securities, puts were more expensive than calls (with same expiration). For example, suppose the underlying security is trading at 50. A put with a strike of 45 is more expensive than a call with a strike of 55. A put with…
Nik I
- 75
- 1
- 1
- 3
5
votes
1 answer
Need for Binomial Representation Theorem
In some texts (e.g. Baxter & Rennie, Shreve I) the binomial model is first constructed using the usual backward induction argument, and it is concluded that by no-arbitrage the time $t$ value of a claim with time $T$ payoff $X$ is…
bcf
- 2,828
- 20
- 35
4
votes
2 answers
Is there a contradiciton between option prices being martingales and the use of options for speculation?
It seems like there is a contradiction between the fact the option pricing is risk-neutral and the large amount of option trading that is done for speculation.
Since the option is risk-neutral, a trader cannot expect to make a profit. He could use…
user1157
4
votes
1 answer
How does out-of-sample option pricing work in practice?
When estimating in-sample option prices, one usually estimates the structural parameters $\theta_t$ using all information up to time $t$, and then prices the option at time $t$ using the obtained parameters and other inputs like the spot price $S_t$…
JohnAndrews
- 538
- 1
- 5
- 18
4
votes
1 answer
Why conversion shows $\frac{\partial C}{\partial T} > 0$?
I'm reading Dupire's "Pricing and Hedging with smiles" (1993). After arriving at
$$\frac12 b^2 \frac{\partial^2 C}{\partial x^2}=\frac{\partial C}{\partial t} , $$
(note: here $C$ is the value of a call option, $t$ refers to its maturity, while $x$…
athos
- 2,231
- 2
- 27
- 43
4
votes
2 answers
How can the claims of this paper be true (on speed of Carr-Madan method for option pricing)?
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2815371
This paper states that a strike-optimized version of the Carr-Madan method for option pricing is faster than the original equivalent that uses FFT.
As you may recall, Carr-Madan formula…
Gundogneoo
- 41
- 1
4
votes
0 answers
Pricing a Double Knock In Option
I have been looking at pricing a barrier option that has payoff of your usual European Call option, $\max(S_T - K, 0)$ if the stock price exceeds a horizon $A$ and then afterwards drop under some level $B$. We have the constraints $B < S_0 < A$ and…
Anonymous
- 151
- 2
4
votes
1 answer
Determining price of Option interview question
I'm not too sure what the answer is to this. You have a call option on a security worth 100 now that will either be worth 110 or 95 dollars at a future date. The strike of this option is 105. What is an estimated value of this call option?
Thanks
Jojo
- 895
- 8
- 20