Cutting edge introduction: Funding holes in Black-Scholes

HSBC quant builds funding costs and haircuts into Black-Scholes option pricing formula


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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