Monthly Archives: September 2009

Implied density of the underlying

If we know call option prices for every strike (underlying and expiry date being the same for all of the options), and the option price is a twice differentiable function of the strike, then we can calculate the probability density of the underlying on the expiry date. This density is implied by the option prices. Continue reading

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Why I use Black formula rather than Black-Scholes

When I need to price a European option, I use Black formula, rather than Black-Scholes. Although both formulas give the same result when applied correctly, I think that Black formula is a bit more general. Let me show why. Continue reading

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Pricing interest rate swaps

To price an interest rate swap (e.g. fixed versus 6 months LIBOR paid semi-annually), one needs to use 2 zero-rate curves: a discount curve and a prediction curve (a.k.a. forecast curve). This article by Bruce Tuckman and Pedro Porfirio gives … Continue reading

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