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.
5,701 documents
The document clarifies why a credit valuation adjustment amount alone does not determine a hedge. CVA is a price, so a desk first needs its sensitivities to relevant market factors; hedge positions are then selected to offset those exposures. The credit…
The note clarifies two uses of risk terminology in finance. “Risk numbers” commonly refers to quantitative measures of the risk in a position or trading desk, such as value at risk (VaR) or expected shortfall (ES). These measures summarize potential losses…
The note explains how to recover interval caplet volatilities from a term structure of at-the-money cap volatilities. A quoted cap volatility is a flat volatility that prices the cap as a whole, combining the values of its component optionlets; it is not…
The document considers how accurately a forward LIBOR market model should price portfolios of derivatives designed to replicate floating notes, including portfolios containing complex Bermudan products. The key guidance is that matching swaption prices…
The document addresses why a standard Black–Scholes implied volatility calculation may fail to reproduce a calculator’s result for Eurodollar options. Its accepted answer says the quoted volatility is based on the implied rate, so the futures price and…
The document explains how to value a bond at a future evaluation date and how that choice differs from changing the yield curve. Setting the evaluation date forward excludes cash flows that have already occurred. The bond’s issue date does not affect this…
The document considers a European swaption whose underlying swap begins accruing before the option’s exercise date. In that setup, some swap cash flows may already be realized or fixed at exercise, so the usual representation based on the value of a wholly…
The document asks whether a one-year coupon bond valuation on a date between coupon payments represents a clean or dirty price. The example discounts the next coupon and the later principal-plus-coupon payment at the stated yield over the remaining fractions…
The document asks how to implement the Black–Derman–Toy short-rate model when a steady-state interest-rate curve and volatility curve are available. It presents the model’s stochastic differential equation and raises the question of whether those curves can…
The document shows how a self-financing strategy with nonzero initial value and zero terminal value can be combined with a risk-free asset position to construct a strong arbitrage. If the original strategy starts with a negative value, add enough of the…
The note explains that inflation does not appear as a direct input in the weighted average cost of capital (WACC). WACC combines the costs of equity and debt, weighted by their respective shares of financing, so inflation affects it through changes in the…
The answer explains how to model a bond for PRIIP Category 3 by representing its value as dependent on a yield curve across maturities. Rather than simulating every tenor’s rate independently, it recommends applying principal component analysis to the…
The document presents the Jarrow–Yildirim model’s risk-neutral dynamics for the nominal short rate, real short rate, and inflation index. The index’s proportional change has a drift given by the nominal rate minus the real rate, alongside a stochastic term…
The document asks whether exchange-traded short-term interest rate futures and their options have a standard modeling framework comparable to SABR extensions of the Libor Market Model used for over-the-counter derivatives. Its focus is the difference between…
This exchange discusses fitting a Nelson–Siegel discount curve to fixed-rate bond prices with QuantLib. The reported failure occurs when calling the fit results, and the accepted answer identifies a scaling issue in the bond helper: fitting with a face…
The document explains how to estimate a short-dated EUR/USD cross-currency basis from spot and forward FX rates together with the relevant interest rates. It applies covered interest rate parity: the forward rate and the euro rate imply a dollar borrowing…
The discussion explains why a euro-denominated target return cannot be converted into a sterling hurdle rate simply by multiplying it by the current exchange rate. An exchange rate converts currency amounts; it does not translate a percentage return target…
Brazilian One-Day Interbank Deposit futures reference the local interbank rate and settle financially. No deposit or other asset changes hands; instead, positions receive or pay daily cash adjustments based on the change in a contract unit price, adjusted…
The document discusses why a covariance matrix of changes in forward rates may fail to be positive definite when used for principal component analysis. It distinguishes a matrix with small negative eigenvalues caused by floating-point round-off from a matrix…
The document considers two ways to estimate a product’s interest-rate sensitivity to a yield curve built from quoted instruments. One method shifts every instrument quote by the same amount, rebuilds the curve, and revalues the product. The other shifts each…
The document offers an intuition for comparing the duration and convexity of a Treasury bond with those of a payer interest rate swap having a similar fixed rate and maturity. It frames the difference between the bond and the swap as a floating-rate bond:…
The document describes how to approximate historical monthly returns for long bonds when only a yield series is available. At each month end, the method assumes purchase of a hypothetical 30-year bond priced at par, with its coupon set equal to that month’s…
The document explains a simplified way to estimate the adjustment between short-term interest rate futures and cash rates. The quoted approach compares a futures-implied rate with a reference rate derived from a swap curve; the observed difference is treated…
The document asks how to estimate six-month carry on a spot-starting interest rate swap and why the DV01 of the remaining forward-starting swap is used. It frames carry as arising from the difference between the swap’s fixed rate and the floating leg fixing,…