Cutting edge introduction: Funding holes in Black-Scholes

When pricing options, traders tend to avoid complexities such as funding costs and benefits, and haircuts on stocks used to delta-hedge options, but they do so at the risk of serious mispricing, warns one HSBC quant. Nazneen Sherif introduces this month’s technical articles


In common with other derivatives, trading options involves funding costs. However, the impact of funding is often ignored entirely or only partially modelled into options prices – an omission that could cause trades to be significantly mispriced, according to Wujiang Lou, a director in global fixed-income trading at HSBC.

In this month's first technical, Funding in option pricing: the Black-Scholes framework extended, Lou offers an extension to the Black-Scholes pricing formula, which takes

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What gold's rise means for rates, equities

It has been several years since we have seen volatility in gold. An increase in gold volatility can typically be associated with a change in sentiment and investor behavior. The precious metal has surged this year on increased demand for safe haven…

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