Questions tagged [no-arbitrage-theory]
The no-arbitrage-theory tag has no usage guidance.
186
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Pricing / valuing anticipated repayment date
I am a long time lurker, and frankly not a quant, but have deep respect for those that are.
I have found myself in a situation dealing with some features on debt that I am trying to figure out how ...
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75
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Potential arbitrage opportunity or fallacy?
Suppose we have two European options with the same expiration: a call priced at $c$ with strike price $K_1$ and a put priced at $p$ with $K_2 (>K_1)$. Further, suppose the zero-points of the two ...
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67
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Confusion about how price of a contingent claim at time 1 could give arbitrage
I have been reading the book Tomas Bjork's Arbitrage Theory in Continuous Time and could not understand how there could be arbitrage if the price of a contingent claim is not $X$.
To give some ...
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Showing a basic market admits no arbitrage
I'm learning the fundamentals of financial mathematics and came across the following problem I cannot solve
Setting
We work in $\left(\Omega, \mathcal{F},\left(\mathcal{F}_t\right)_{t=0}^1, \mathbb{P}\...
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115
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Shape of Yield curve of ZCB under no-arbitrage
Sorry if the question is somewhat elementary, but I have thought about it for a while and I cannot figure out where my mistake is.
Suppose we are in are in an arbitrage-free market in which risk-free ...
- 103
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Is this arbitrage? Infinite payoff / infinite loss (energy generation investment problem)
I'm a student using stochastic optimization in energy systems and I have a particular phenomena in an optimization problem that I think must occur in finance aswell, so I have been trying to find ...
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282
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filtering implied Vol surface for butterfly arbitrage
Suppose I have a volatility surface (matrix in time and strike) but it might have butterfly arbitrage in it. I want to remove nodes from the surface so that the Vol surface is butterfly arbitrage free....
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131
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Decomposing a bond's excess returns into duration, volatility, and market-price-of-risk. Discrepancy/confusion with Rebonato text
I am working on deriving the formula for the market price of risk for zero-coupon bonds and the associated formula for the excess returns. I am following the derivation in Appendix 12.6 of Rebonato's ...
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217
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Understanding completeness in this simple one-period exercise
Let's consider a one period model (t=0, 1) with one risk-free asset that yields r, and one risky asset. $S_t^j$ will be the value of the asset j=0,1 at time t=0,1, where j=0 is the risk-free asset and ...
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133
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The relationship between no-arbitrage and the law of one price
If no-arbitrage exists, then the law of one price holds, but the existence of the law of one price does not always imply that no-arbitrage exists." To prove this, what is an example where the law ...
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70
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Does arbitrage theory actually help in practice? If so, how?
Am wondering if arbitrage theory (the ones defined "classically" with stochastic processes, martingales, etc.) is actually helpful in practice for an actual trader beyond simply having an ...
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43
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Implementations of stochastic collocation for Arbitrage Free SABR
I am currently reading this paper (link) on fitting arbitrage free parameters for SABR using stochastic collocation. Are there any publicly available github repos that implement solutions that are ...
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76
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Binomial option pricing model for American options on assets paying a continuous dividend yield
Let's say an asset has a continuous dividend yield of 5% (and assume interest rate is 0%). If I want to price an American call option on such an asset, I take each time step individually and construct ...
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82
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Filipovic: Where is it used that the world is deterministic
In this text (Damir Filipovic, Term-Structure Models, Springer, 2009) $P(t,T)$ denotes the price of a zero-coupon bond at time $t$ with maturity $T$. I cannot see where the proof uses the ...
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51
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No arbitrage principle in Counterparty Credit Risk
I think this is a fairly basic question but I'm struggling to understand the no-arbitrage principle applied to CCR.
Imagine that we want to calculate the exposure evolution in an IR derivative, ...
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