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 distinguishes the probability implied by an option model from uncertainty about whether that model is correct. Under a specified risk-neutral measure and pricing model, an in-the-money probability is a model-implied quantity; gamma does not…
The document introduces speed, the change in gamma as the underlying moves, and color, the change in gamma over time, then asks how traders might capture such higher-order sensitivities. Its answer focuses on gamma scalping: establish a delta-neutral,…
The document explains why a credit default swap can have interest-rate exposure even though its main market risk is credit. In a simplified reduced-form model with flat, deterministic interest and hazard rates, CDS value is framed as the difference between…
The document explains how to estimate the change in delta as rates move for a curve trade that offsets the DV01 of 20-year and 30-year swaps. It gives a rule of thumb that relates convexity to swap tenor and PV01, then offers a shape-sensitive approximation…
The question considers simulating an interest rate curve from historical key rate changes, using a covariance matrix and a normal copula, then interpolating the simulated rates and repricing assets. It also asks whether historical curves can be interpolated…
The document concerns retrieving historical option identifiers through Refinitiv Eikon or Datastream services, especially for expired contracts linked to an underlying security. The question asks how to turn an ISIN, RIC, or mnemonic into a list of…
The document asks which options lack closed-form pricing formulas and describes several cases where numerical methods are commonly used. The answer points to American options, whose early-exercise feature requires checking whether exercising is preferable at…
The note clarifies how the daily correction factor for Brazilian DI futures is applied to settlement prices. It addresses whether the factor uses the prior day’s DI rate or the current day’s rate, and how public holidays affect the calculation. The answer…
The discussion distinguishes par CDS spreads, which are bootstrapped together to infer a piecewise hazard curve, from quoted spreads, which are interpreted using a flat hazard curve for an individual tenor. It also defines quoted upfront as the value…
The document compares computational approaches for long-dated American options. One answer recommends implicit or Crank–Nicolson finite-difference methods: these can use larger time steps on a given price grid than a binomial tree and can restrict the…
The document discusses the Bloomberg EUR implied three-month forward rate and asks how it is derived and which instruments support the underlying curves. The replies explain that the quote is connected to foreign exchange interest rate parity: the FX forward…
The document examines whether a simple chooser option can be valued as the sum of a call and a put. The proposed algebra uses put-call parity to express the maximum of call and put values as a call plus a put-like term. The answer confirms the decomposition…
The document asks why a binomial option-pricing derivation uses a portfolio combining a long option with a short position in the underlying stock. In its one-step example, the stock starts at a stated price and can move up or down by one unit; the call…
The document explains why an open repurchase agreement cannot be assigned one universal price without specifying its renewal and termination terms. An overnight repo that renews by tacit agreement is treated as a one-day repo: use the prevailing one-day rate…
The document asks why an expiring Eurodollar futures contract is quoted and settled as 100 minus LIBOR rather than as the discounted present value of a three-month deposit. The reply frames settlement through convergence and market indifference: at expiry,…
The document compares two ways to accommodate negative short rates in Cox–Ingersoll–Ross models. A displaced CIR shifts the rate by a constant so the shifted process follows the standard square-root model. CIR++ instead adds a deterministic time-dependent…
The document explores whether implied volatility represents the market’s expected volatility, why volatility often rises as equity prices fall, and why out-of-the-money puts tend to have higher implied volatility than calls. One answer notes that…
The document asks how to estimate local volatility with Dupire’s formula using finite differences in option prices across maturity and strike. Its answer stresses that local volatility is a function of time and the underlying price, rather than a volatility…
The document explains the rationale for setting the up and down multipliers in a binomial asset-price tree to exponential functions of volatility and the square root of the time step. The scaling makes the size of each log-price move proportional to…
The document considers how default changes the probability distribution of a stock price at a future date. It proposes representing the probability mass associated with survival through a maturity-dependent factor multiplying a standard lognormal price…
The discussion considers how to turn sparse USD LIBOR forward or projection rates into a curve for forecasting floating coupons in an interest rate swap, with a separate curve used for discounting. It cautions that a set of rates at selected maturities does…
The question asks how early exercise of an American put can be optimal when the option has nonnegative time value. The answer distinguishes the time value surrendered on exercise from the benefit of receiving the strike sooner. With positive interest rates,…
The document asks why the delta of a standardized, perpetually at-the-money, 30-day put on SPY became less negative during the 2008 financial crisis. The described series uses OptionMetrics data, with standardized option prices derived by linear…
The document explains the common decomposition of an option’s market price into intrinsic value and time value. Intrinsic value is the immediate exercise payoff; time value is the residual after subtracting intrinsic value from the option price. For a call,…