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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 BlackScholes
When I need to price a European option, I use Black formula, rather than BlackScholes. 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
Pricing interest rate swaps
To price an interest rate swap (e.g. fixed versus 6 months LIBOR paid semiannually), one needs to use 2 zerorate curves: a discount curve and a prediction curve (a.k.a. forecast curve). This article by Bruce Tuckman and Pedro Porfirio gives … Continue reading