What are Low Discrepancy Numbers? Low discrepancy sequences cover a space without clustering or gaps. Adding another number to the sequence prevents clustering and gaps. They offer the appearance of…
Why is Lognormal Distribution Important? The lognormal distribution is commonly used to simulate the distribution of equities and commodity prices, exchange rates, and indices. The normal distribution is commonly used…
How to Assume Normal Distributions? How to Assume Normal Distributions? – The answer must be ‘it depends.’ It depends on the timeline used to measure returns. Stocks with short timelines,…
What is Market Price of Risk? The market price of risk refers to the desired return over the risk-free rate as compensation for taking on risk. A Short Example Historically…
What is Calibration? Calibration is knows as selecting model parameters to ensure that the theoretical values for exchange-traded contracts that your model generates match the market prices at any given…
What is Value of a Contract? Value refers to the notional cost of creating a new contract from simpler items, such as reproducing an option through dynamic buying and selling.…
What is Bootstrapping? Bootstrapping involves creating a forward interest-rate curve that aligns with the market pricing of common fixed-income products like bonds and swaps. The curve can be used to…
What is Dispersion Trading? Dispersion trading involves selling options on an index and buying options on individual stocks. This technique exploits correlations during both routine and major market swings. If…
What is Volatility Smile? The expression “volatility smile” refers to the variation in implied volatilities of options based on their strikes. A smile indicates that out-of-the-money puts and calls have…
What is Complete Market and Incomplete Market? In a complete market, derivative products can be created by combining basic instruments like cash and underlying assets. Typically, a portfolio of simpler…
The Whispering Void