Option Adjusted spread (OAS) is usually calculated for bonds with embedded options (call or put) OAS is a constant spread over discounting curve you have to apply to back up market price of the bond this spread is adjusted to…
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Category: OTC derivatives valuation
call option 101
what is a call option? it’s an option which give right (=option) to buyer to buy a stock at fixed price called strike example of call option company A buys a european call option on Microsoft stock with strike 10…
Posted in OTC derivatives valuation
financial derivatives 101
what are the financial derivatives? basically it’s a contract which price is based on price of another financial asset example of a derivative company A buys a derivative form bank B by which B will pay 1 million euros if Ibex 35 index…
quanto adjustment formula example
what is a quanto adjustment? it’s an adjustment to forward price of underlying if payoff’s currency is diferent from underlying’s currency example if payoff currency is EUREUR and underlying is in USD (for example DowJones index) then we’ll need to…
how to value Eonia swap
what is an EONIA swap (call money swap)? it’s a swap where we exchange fixed rate for variable rate calculated with dayly EONIA rate (Euro OverNight Index Average) the payments are based on average EONIA rate , which corresponds to…
accounting for stock options
What is a stock option plan? it’s a executive’s incentive plan whoch consists in giving employee a number of stock options which can be exercised only after certain period have passed (vesting period), normally few years Accounting for stock options…
CVA credit valuation adjustment
CVA (Credit Valuation Adjustment) = market value of counterparty credit risk Recent high levels of CDS spreads make CVA an important quantity in valuation of OTC derivatives. Before, the same interest rate swap would have the same value for two…
OIS discounting
Swap valuation with OIS discounting OIS-discounting (from Overnight Indexed Swap) is a derivatives valuation method considering multiple curves (and not one as before) for discounting and for projecting future cash flows.It’s used for collateralized derivatives. CSA (Credit Support Annex) its…
How to value FX forward pricing example
FX forward Definition An FX Forward contract is an agreement to buy or sell a fixed amount of foreign currency at previously agreed exchange rate (called strike) at defined date (called maturity). FX Forward Valuation Calculator FX forward example trade…
Posted in OTC derivatives valuation Tagged with: foreign exchange risk, fx, fx forward, otc derivatives
simple example Libor Market Model (BGM)
Libor Market Model is a model where Libor forwards have log-normal distribution in their’s respective probability measures (called T-measure) example of Libor Market Model with just 2 forwards: $$ P_3(t)$$ is a price at time t of zero-coupon bond paying…
