• Valuing an American Option Using Binomial Tree-Derivative Pricing in Excel
    In a previous post, we provided an example of pricing American options using an analytical approximation. Such a pricing model is fast and accurate enough for risk management purposes. However, sometimes more accurate results are required. For this purpose, the binomial (lattice) model can be used. Wikipedia describes the binomial tree model as follows, In finance, the binomial options pricing model (BOPM) provides a generalizable numerical method for the valuation of options. The binomial model was first proposed by Cox, Ross and Rubinstein in 1979. Essentially, the model uses a "discrete-time" (lattice based) model of the varying price over time of the underlying financial instrument... The binomial pricing model traces the evolution of the option's key underlying variables in discrete-time. This is done by means of a binomial lattice (tree), for a number of time steps between the valuation and expiration dates. Each node in the lattice represents a possible price of the underlying at a given point in time. Valuation is performed iteratively, starting at each of the final nodes (those that may be reached at the time of expiration), and then working backwards through the tree towards the first node (valuation date). The value computed at each stage is the value of the option at that point in time. We utilized the lattice model previously to price convertible bonds. In this post, we’re going to use it to value an American equity option. We use the same input parameters as in the previous example. Using our Excel workbook, we obtain a price of $3.30, which is smaller than the price determined by the analytical approximation (Barone-Andesi-Whaley) approach. [caption id="attachment_561" align="aligncenter" width="335"] American option valuation in Excel using Binomial Tree[/caption] [sociallocker id=496][/sociallocker] Article Source Here: Valuing an American Option Using Binomial Tree-Derivative Pricing in Excel Read more Derivative Valuation
  • Tilray CEO Sees Cannabis Disrupting Pharmaceutical and Alcohol Industries
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  • Fintech could be bigger than ATMs, PayPal, and Bitcoin combined
    This is a preview of a research report from Business Insider Intelligence, Business Insider's premium research service. To learn more about Business Insider Intelligence, click here. Fintech broke onto the scene as a disruptive force following the 2008 crisis, but the industry's influence on the broader financial services system is changing.  The fintech industry no longer stands clearly apart from financial services proper, and is increasingly growing embedded in mainstream finance. We’re now seeing the initial stages of this transformation. For instance, funding is growing more internationally distributed, and startups are making necessary adjustments to prove sustainability and secure a seat at the table. Most fintech segments in the ascendant a year ago have continued to rise and grow more valuable to the broader financial system. Meanwhile, several fintech categories have had to make adjustments to stay on top. New subsegments are also appearing on the scene — such as digital identity verification fintechs — as new opportunities for innovation are discovered.  Significantly, incumbents are responding more proactively to the rising influence of fintech by making updates to their consumer-facing channels, back-end systems, and overall business operations. Most are realizing that the best way to adapt is to work alongside the fintechs that are transforming the financial services environment, either by partnering with them or acquiring the startups entirely. As fintech's power grows, incumbents will have no choice but to change in order to stay relevant and competitive. All around, fintech is becoming embedded in mainstream finance. Business Insider Intelligence, Business Insider's premium research service, has written the definitive Fintech Ecosystem report that looks at the shifts in the broader environment that fintechs operate in, including funding patterns and regulatory trends; examines the adaptations that some of fintech's biggest subsegments have had to make to secure a foothold in the financial services system; and discusses how the continued rise of the fintech industry is pressuring incumbents to make fundamental changes to their business models and roles. It ends by assessing what a global economy increasingly influenced by innovative fintechs will look like. Here are some key takeaways from the report: The fintech industry is far more than a group of digitally native, consumer-centric startups, although they are, in many ways, becoming the new face of financial services. It's increasingly clear that fintech no longer stands apart from financial services proper, and is morphing into an integral part of the financial system.  To secure their position in the mainstream economy, some of the main fintech subsegments have had to adjust their business models. These include neobanks, robo-advisors, and alt lenders. Other fintech categories, meanwhile, have instead found that current conditions are well suited to their original models, and are seeing largely smooth sailing, like regtechs, insurtechs, and payments fintechs. Innovation and dynamism is still alive in fintech too, with new categories still emerging. The rising influence of fintechs is having a dramatic effect on incumbents, from banks to insurers to wealth managers, pushing them to respond proactively to stay relevant. Incumbents are reacting to changes wrought by fintechs on three key fronts: the front end, the back end, and in their core business operations. As such, incumbents and fintechs are converging on a digital middle ground. As this happens, the fintech industry is on the cusp of becoming an integral component of the broader financial services ecosystem. But it will likely first have to go through a complete credit cycle, and survive an economic downturn like the one that set the stage for its arrival in 2008, for this to happen. In full, the report: Looks at how the environment in which the fintech industry operates is changing, and what that means for the digitization of financial services. Gives an overview of the main subsegments within the global fintech industry, and discusses which categories have had to adapt to survive, which have reaped benefits from their original game plans, and which new segments have come to the fore in the past twelve months. Outlines the adaptations that incumbent financial institutions have begun making to adjust to an economy that's inevitably shifting to digital, and in which tech-savvy fintechs are increasingly setting the standards. Discusses what the future of financial services will look like as fintech embeds itself into the financial mainstream. Subscribe to an All-Access membership to Business Insider Intelligence and gain immediate access to: This report and more than 250 other expertly researched reports Access to all future reports and daily newsletters Forecasts of new and emerging technologies in your industry And more! Learn More Purchase & download the full report from our research store Join the conversation about this story » Read more Derivative Valuation
  • No Signs of Slowdown in Cloud Business, Says SAP's CFO
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  • Derivative Valuation-How to Price a Convertible Bond
  • Sears Files for Bankruptcy After 134 Years in Business
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  • Credit Risk Management Using Merton Model
    R. Merton published a seminal paper [1] that laid the foundation for the development of structural credit risk models. In this post, we’re going to provide an example of how it can be used for managing credit risks. Within the Merton model, equity of a firm is considered a call option on its asset, and it is expressed as follows, where    E denotes the equity of the firm,                V is the firm’s asset,                 is the asset volatility,                 B is the notional amount of the debt,                r is the risk-free interest rate, and We note that both asset (V) and its volatility are not observable. However, the asset volatility can be related to equity and its volatility through the following equation, where denotes the volatility of equity. These 2 equations can be solved simultaneously in order to obtain V and its volatility which are then used to determine the credit spread Having the credit spread, we will be able to calculate the probability of default (PD).  Loss given default (LGD) can also be derived under Merton framework. Graph below shows the term structures of credit spread under various scenarios for the leverage ratio (B/V). [caption id="attachment_541" align="aligncenter" width="564"] Term structure of credit spread[/caption] It’s worth mentioning that the Merton model usually underestimates credit spreads. This is due to several factors such as the volatility risk premium, firm’s idiosyncratic risks and the assumptions embedded in the Merton model.  This phenomenon is called the credit spread puzzle.  Research is being conducted actively in order to improve the model. References [1] Merton, R. C. 1974, On the Pricing of Corporate Debt: The Risk Structure of Interest Rates, Journal of Finance, Vol. 29, pp. 449–470. Post Source Here: Credit Risk Management Using Merton Model Read more Derivative Valuation
  • Hawkish Fed Rattles Stocks
    In another day of volatile trading , the major equity indexes made a few ... The Cboe Volatility Index (VIX - 17.40) today let go of 0.2 point, or 1.3%.Read more Derivative Valuation
  • US Stocks Under Pressure as Political Risks Weigh
    A measure of implied volatility known as the CBO VIX (NYSEARCA:VXX) rose sharply through the morning session before tapering off later in the day.Read more Derivative Valuation
  • US Market Indexes Close Lower Wednesday
    The VIX Volatility Index was lower at 17.40 for a loss of -0.22 points or ... U.S. market indexes closed lower with lower volatility and lower trading ...Read more Derivative Valuation
  • Hawkish Fed Rattles Stocks
    In another day of volatile trading, the major equity indexes made a few forays onto positive ground, but were unable to find traction north of breakeven.Read more Derivative Valuation
  • Still Worth Taking Risk in U.S. Equities, Says JPMorgan's Peters
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