derivative pricing and models
Educational articles in this subcategory.
Volatility Term Structure Modeling
# Volatility Term Structure Modeling Volatility term structure modeling connects near-term events to long-term vol regimes—similar to yield-curve...
Stress Testing Models for Extreme Moves
# Stress Testing Models for Extreme Moves The March 2020 COVID crash and the 2018 volatility spike (Volmageddon) demonstrated that models calibra...
Smile and Skew Interpretation
# Smile and Skew Interpretation Volatility smiles and skews function like a seismograph for market sentiment—recording fear, complacency, and pos...
Put-Call Parity Applications
# Put-Call Parity Applications Put-call parity is a currency converter between payoffs—transforming calls into puts and stock into synthetics thr...
Pricing Dividend-Paying Underlyings
# Pricing Dividend-Paying Underlyings Dividends reduce stock prices on ex-dates, directly affecting option values. Models must incorporate these ...
Open-Source Tools for Derivative Pricing
# Open-Source Tools for Derivative Pricing Open-source libraries provide a valuable toolbox for derivative pricing—tested implementations of comp...
No-Arbitrage Principles in Derivatives
# No-Arbitrage Principles in Derivatives Arbitrage-free pricing rests on the premise that identical payoffs must have identical prices, within a ...
Monte Carlo Simulation Techniques
# Monte Carlo Simulation Techniques Monte Carlo simulation prices derivatives by simulating many possible paths of the underlying and averaging t...
Model Risk Governance Practices
# Model Risk Governance Practices Model risk governance ensures that derivative pricing models are developed, validated, and monitored according ...
Model Calibration and Validation
# Model Calibration and Validation Model calibration fits parameters to market data; validation confirms the model performs adequately for its in...
Local vs. Stochastic Volatility Models
# Local vs. Stochastic Volatility Models Choosing between local and stochastic volatility models is like selecting between GPS navigation and wea...
Interest Rate Model Families
# Interest Rate Model Families Selecting an interest rate model is like choosing an engine for different aircraft—short-rate models power simple ...
Implied Volatility Surface Basics
# Implied Volatility Surface Basics The implied volatility surface maps how implied volatility varies across strikes and expirations—a topography...
Glossary: Derivative Pricing Terminology
# Glossary: Derivative Pricing Terminology This glossary provides concise definitions of derivative pricing terms used throughout the Derivative ...
Finite Difference Methods Overview
# Finite Difference Methods Overview Finite difference methods solve the Black-Scholes PDE on a discrete grid—a mesh net of spot prices and time ...
Estimating Greeks Numerically
# Estimating Greeks Numerically When closed-form Greeks aren't available—complex payoffs, stochastic volatility models, or path-dependent options...
Black-Scholes Model Inputs and Outputs
# Black-Scholes Model Inputs and Outputs The Black-Scholes model transforms five inputs into an option price and a set of risk sensitivities (Gre...
Binomial Trees for Option Pricing
# Binomial Trees for Option Pricing Binomial trees decompose option pricing into a sequence of discrete decisions—like climbing a decision ladder...
Backtesting Pricing Models Against Market Data
# Backtesting Pricing Models Against Market Data Backtesting replays historical market conditions through a pricing model to measure accuracy aga...
American Option Pricing Approaches
# American Option Pricing Approaches Pricing American options requires solving a free-boundary problem—at each point in time, the holder decides ...