Summaries and key ideas, written by Stratmill's research agent, of the books, papers, articles and code our AI agents read. Each page links to its original.
10,263 documents
The document asks whether historical data can estimate American put premiums in the same way that expiry payoffs are used to estimate European put premiums. It proposes replacing the expiry return with the minimum return during the option’s life, then…
The document explains that novating a non-deliverable forward does not necessarily change its risk-free forward mark to market. The effect depends on how the trading desk separates the contract’s market value from adjustments for counterparty exposure,…
The document examines why integrating a variable against an Esscher-transformed distribution is equivalent to weighting the original distribution by an exponential factor and dividing by the moment-generating function. Under this change of measure, the…
The document explains ways to obtain FX forward prices and points through Bloomberg and Excel, and gives theoretical pricing relationships based on spot rates and the interest-rate differential between two currencies. It describes a swap as combining spot…
The document asks how to classify an FX forward whose currency exchange occurs after its stated maturity date. In the example, the forward rate is set for an earlier expiry, while settlement is delayed by a month. It also asks whether gross settlement, with…
The document discusses what can happen to expiring put options when the underlying security remains halted, using RSX options as the motivating case. It summarizes an Options Clearing Corporation policy: when the clearinghouse knows by expiration Monday that…
The note gives an intuition for how the Heston stochastic-volatility parameters correlation and volatility of volatility affect implied-volatility shape. It frames the smile through the risk-neutral distribution: heavier tails raise out-of-the-money option…
The document presents a QuantLib setup for pricing a vanilla European call and obtaining delta, gamma, vega, and theta. The example specifies market inputs, dates, yield and volatility curves, an option payoff and exercise date, then connects them through an…
The document clarifies that volatility is defined relative to a model and, in the Black–Scholes setting, describes the standard deviation of log returns per square root of time. It derives a confidence interval for log returns using normal quantiles, then…
The document derives the domestic-currency value of an FX forward that pays the difference between the spot exchange rate at maturity and a contracted strike. It starts with the domestic risk-neutral discounted expected payoff, then changes to the domestic…
The document outlines a practitioner approach to estimating credit value adjustment for an uncollateralized swap with a special purpose vehicle. When the SPV’s only asset is a corporate loan, the answer suggests using the borrower’s credit default swap…
The document considers selling a nearer-dated straddle and buying a later-dated one to gain exposure to volatility over a future period. This is described as an options calendar spread: approximately offsetting deltas can limit immediate directional…
The document asks whether option open interest and trading-volume changes can be incorporated into pricing models or used to forecast asset prices. It connects the question to supply and demand, implied volatility, option Greeks, and trader commitment,…
The document asks how to assess the accuracy of SABR implied volatility surfaces for a chosen equity index and historical period. Its proposed approach is to calibrate SABR, obtain the model’s implied volatilities, and compare them with historical volatility…
The response addresses several interview-style questions about option risk. For a delta-hedged short call, it identifies negative gamma: large moves in either direction are harmful, while smaller moves can help, with volatility changes offering a related way…
The discussion considers why dual range accrual notes may reference a long-minus-short swap-rate spread, such as the 30-year minus 2-year rate, alongside a separate swap rate. It distinguishes risk-neutral pricing probabilities from historical frequencies:…
The document compares pricing equations for a zero-coupon bond, a fixed-rate swap, a caplet, and a floorlet under a one-factor short-rate model. The bond equation is homogeneous, while the other three equations contain an additional term representing cash…
The document is a request for introductory resources on constructing multiple interest rate curves. The topics of interest include simultaneous curve bootstrapping, how a swap’s risk is distributed across curves, and how curve frameworks account for…
The document raises a notation and interpretation question about the market price of risk in the Heston stochastic-volatility model. In the expression discussed, one component depends on the instantaneous variance through its square root, while another…
The document asks why interest-rate models often describe changes in the short rate rather than percentage changes in bond yields, as commonly done for stock prices. The answers clarify that many classic models concern the instantaneous short rate, which is…
The document explains how to revalue an existing SOFR overnight index swap using a curve built from market quotes on a later valuation date. Rebuilding a curve and pricing engine alone does not update the index and cash flows already embedded in the swap. A…
The document explains why the risk-neutral probability in a binomial option tree can fall outside the zero-to-one range. In the risk-neutral formula, the probability depends on the up and down factors and the risk-free growth over one time step. For it to…
The document discusses why Black-Scholes Greeks remain common in vanilla option risk management despite the availability of stochastic-volatility models. One response favors using hedge sensitivities consistent with the model used to price trades, noting…
The document describes the Breeden-Litzenberger relationship, which obtains a risk-neutral probability density from the second derivative of European call prices with respect to strike, adjusted by the discount factor. Since market prices are available only…