Pricing and Valuing Financial Instruments
Pricing and Valuing Financial Instruments · 06. October 2024
To price an interest rate swap (IRS), you find the fixed rate (C) that makes the present value of the fixed leg's cash flows equal to the floating leg's present value. The fixed leg's value is the sum of discounted fixed payments, while the floating leg approximates the notional principal.
Pricing and Valuing Financial Instruments · 30. September 2024
Option pricing, a key financial market challenge, relies on the Fourier transform to address complexities in valuation. An option grants the right to buy or sell an asset at a strike price, K, by expiration, T. The current price depends on the expected payoff, e.g., for a European call: max(S_T - K, 0). This is challenging as future asset prices follow complex stochastic processes.
The Fourier transform simplifies this by converting payoff calculations from time to frequency domain.
Pricing and Valuing Financial Instruments · 23. September 2024
A swaption is an option to enter a future interest rate swap, with two types: a payer swaption (benefits from rising rates) and a receiver swaption (benefits from falling rates). Used for hedging or speculation, swaptions are valued using the forward swap rate, the zero-coupon curve, and implied volatility. Black’s model is often applied for pricing by considering factors like notional, strike rate, and volatility.
Pricing and Valuing Financial Instruments · 03. November 2023
Le modèle de Cheyette est un outil financier complexe pour prédire les mouvements des taux d'intérêt, prenant en compte la réversion à la moyenne et la volatilité variables dans le temps. Il est plus sophistiqué que des modèles plus simples comme celui de Vasicek en raison de ses paramètres détaillés, ce qui le rend robuste mais également plus intensif en calculs et moins couramment utilisé en pratique.
Pricing and Valuing Financial Instruments · 03. October 2023
Stopping time helps optimize the exercise of exotic options to maximize payoff. It aids in deciding when to exercise these complex, event-conditioned options before expiry. Specialized models beyond Black-Scholes, like Binomial Tree, address this by balancing immediate vs. future exercise values. #StoppingTime #ExoticOptions
Pricing and Valuing Financial Instruments · 10. June 2023
In the world of foreign exchange (FX), two indicators help traders decode market mood: Risk Reversal (RR) and Butterfly (BF) volatilities. Imagine RR as a compass, pointing to bullish or bearish winds by comparing the price expectations of currency going up (call options) to it going down (put options). On the other hand, BF is like a barometer, forecasting calm or stormy weather by measuring the expected price stability of currencies.
Pricing and Valuing Financial Instruments · 01. April 2023
Bank sells a Knock-Out (KO) call option on Stock XYZ to a bullish trader. If stock hits $110, the option ends. To hedge risks like vega and vanna from the KO option, the bank uses a Risk Reversal (RR). They buy call options and sell put options on Stock XYZ. This manages volatility changes and price shifts, ensuring stable positions. If the stock reaches $110, the KO ends with no payout due. The RR helps the bank control risk.
#HedgingStrategies #RiskReversal #OptionsTrading #BarrierOptions