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Blog-style articles that help you understand derivatives better by pricing them in Excel.

Dependence of USD Interest Rate Swaps Price & Risk on Modelling Assumptions affecting the Curve Building

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In my post about USD Interest Rate Swaps in Excel, I have explained in detail how to calculate the price and risk of a single USD interest rate swap using a multi-curve approach and actual market data from Bloomberg as of 22 May 2019.A comparative analysis between the single-curve and multi-curve approach has been laid out in my post focusing on sw...
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Pricing of Cross-Currency Collateralized Swaps using OIS vs non-OIS Discounting: The Mexican case.

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Last week I described the unique problem faced by interest rate swap traders when the collateral is kept in a currency different than the one where the swaps are denominated. You may want to visit that post for details on how the appropriate discounting (basis) curve in the Mexican case is constructed out of several market rates that include t...
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Building in Excel the Implied Risk-Free Discounting Curve when the Collateral is kept in another Currency. Example: Mexico, where no Local OIS Market exists.

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Before the 2007-08 financial crisis, all swap cash flows were discounted with the same yield curve used in "forecasting" the future Libor rates and thus the amounts of the floating cash flows.At any given time, this yield curve was constructed so that it reproduced the market prices of the swaps traded at that time.After its construction, the yield...
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Using Bloomberg Tenor Basis Swap Spreads in Excel to calculate 1M USD Libor Forward Rates

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Until the 2007-08 financial crisis, forward interest rates of any tenor had been calculated off one single yield curve. In the US, traders had been building one USD yield curve out of market-traded deposits, futures and fixed-to-3M-Libor swaps and used that curve for all purposes involving interest rate calculations, such as extracting discount fac...
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Carry and Roll-Down of USD Interest Rate Swaps in Excel with Bloomberg Comparison

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In my previous two posts I have shown how to calculate the price and DV01 of a single interest rate swap and how to do so with a book containing thousands of swaps.Now I turn my attention to the calculation of the Carry and Roll-Down of a single swap, which is defined as the total amount earned (realized + unrealized) by holding a swap up to a...
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Trading Blotter and Book Risk Management of USD Interest Rate Swaps in Excel: Example of a Book with 10,000 Trades.

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In my previous post about USD Interest Rate Swaps in Excel, I explained how to calculate the price and risk of a single USD interest rate swap using actual market data from Bloomberg as of 22 May 2019.In the current post, I will make use of the same market data to calculate the prices and DV01s (both flat and bucket) of two different swap collectio...
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USD Interest Rate Swap: Cash Flows and DV01 in Excel using Bloomberg Market Data

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In this post I will make use of the realistic yield curves I built in Excel out of Bloomberg OIS, deposit, futures and Libor swap rates as of May 22, 2019 towards calculating the price and producing the detailed cash flows, flat DV01 and maturity-dependent DV01s of a bespoke forward starting 3-year swap.You may want to visit the respective article,...
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OIS Discounted USD Libor Curve Production in Excel for Front Office Trading

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I have already explained in my earlier yield curve building post how one can use the Excel Deriscope addin to derive the discount factors and zero rates implied by any given market rates of deposits, futures and swaps.At another post about dual bootstrapping, I calculated in Excel the price of an actual 50-year EUR collateralized swap held by ...
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Almost Corporate-Ready Unlimited-Currency FX Option Portfolio Pricing with and without Excel

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The question whether Excel can be trusted for pricing and risk managing derivative transactions seems to be a never ending one.If you are curious about my own opinion on this matter, you may jump to the end of this article. In the sequel, I will confront this issue through the real-world case of pricing and managing a book of FX options.In my last ...
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Valuing a Portfolio of Multi-Currency FX Options and Producing its Value at Risk in Excel using Deriscope

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The topic here is not about simple option pricing but rather about dealing with the complexity introduced by the simultaneous existence of several different currencies in the context of calculating the Price and Value at Risk of a portfolio of European FX options.If you are not familiar with the basics of European option pricing in Excel using Deri...
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Floating Rate Notes (FRN) in Excel: Understanding Duration, Discount Margin and KRD

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Deriscope exports in Excel over 30 functions that deal with bonds, as I have described in an earlier document about bond risk management functions.In spite of the fact that the referred functions apply to all types of bonds, including interest rate and inflation linked bonds, one should be cautious when the referenced bond does not pay a fixed rate...
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Combining Randomized Quasi Monte Carlo (Sobol) and Parallel Processing (Multithreading) when Pricing Derivatives in Excel

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The beauty of Monte Carlo simulation is that it can be used to price any European financial derivative contract, of which the terminal payoff is expressed as a function of D terminal underlying factors by simulating the terminal values of these factors as of the contract's maturity date.It turns out, the successful execution of a Monte Carlo simula...
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Monte Carlo Pricing of any European Structured Product in Excel: Revisiting the Morgan Stanley Trigger Plus 2024 Note

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In my previous article I showed how one can use Deriscope in Excel to calculate the price of a particular type of a structured product that pays the minimum of two equity indices observed at some specified future terminal time. As example was used the Trigger Plus note issued by Morgan Stanley on April 1, 2019, which is based on the value of t...
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Perfect Bloomberg Price Match of an Interest Rate Swap in Excel by using Dual Bootstrapping

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Up until the financial crisis of 2008, the price calculation of an interest rate swap involved only the so-called Libor curve. The latter was essentially the discount factors (or equivalently zero rates or forward rates) implied by market-traded instruments, such as deposits, futures, forwards and swaps. The Libor curve was used to derive everythin...
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Pricing Structured Products in Excel: The Morgan Stanley Trigger Plus 2024 Note

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Various structured products can be precisely priced in Excel using Deriscope and its underlying QuantLib analytics. In this article I will focus on the Trigger Plus product issued by Morgan Stanley on April 1, 2019. It is based on the value of the worst performing of the Dow Jones Industrial Average and the Russel 2000 Index due April 4, 2024. It o...
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Currency Swaps and Basis Curves in Excel

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​The basic concepts of spot fx rates, forward fx contracts, fx swaps and the construction of foreign yield curves out of fx forward rates have been described in detail in my previous fx rates article.While these instruments cover the short end of the maturity spectrum – typically about a year -, the tenor of so-called currency swaps (also know...
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FX Spots, Forwards, Swaps and Curves in Excel

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​Assume you possess Nd units of a currency DOM regarded as domestic currency. For example, you live in the US and hold 1,000 USD, ie. Nd = 1,000 and DOM = USD.For whatever reasons, you want to replace this money with their equivalent number of units Nf of another currency FOR regarded as foreign currency. For concreteness think of FOR like if it we...
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Bond Key Rate Duration (KRD) in Excel: Calculating and Understanding

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You are all familiar with the concept of bond Duration, which tells us how much a bond's price changes if its yield goes up or down by a small amount.While there exist several different Duration definitions that produce slightly different results, the one that is most closely related to the Key Rate Duration is the Modified Duration D, which may be...
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Risk free Yield Curve Building in Excel using Negative Overnight Index Swap (OIS) Rates

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Long are the dates when all-purpose risk free yield curves were produced out of deposits, futures and swaps. Since the credit crisis of 2007/08, banks realized they should use different curves for different purposes. In the intervening years, quants have proven mathematically that uncollateralized contingent flows should be discounted using a curve...
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Overnight Index Swap (OIS): Pricing and Understanding using Excel

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Overnight Index Swaps (OIS) may be priced in Excel using the free and open source derivatives analytics QuantLib library through the Deriscope Excel interface.An OIS contract is very similar to a plain vanilla interest rate swap, the only difference being that each payment in the floating leg is calculated according to a floating number F that equa...
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How to compute the VaR: Step-by-Step Excel Guide

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The purpose of this article is to show you step-by-step how you can calculate the Value at Risk (VaR) of any portfolio by generating all simulation samples in the spreadsheet. This is great for understanding what's going on but it becomes too complex and slow when the number of samples generated by the simulation exceeds 100.If you don't ...
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Pricing of Risk Scaling Options in Excel

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You are all familiar with simple European call options that are securities promising to pay their holders at some agreed future time T the difference S(T) – K between the price S(T) realized by a monitored underlying S at time T and a fixed amount K, under the condition that S(T) is greater than K. The last long sentence may be compressed to t...
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Market Data in Excel from IEX

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IEX (Investors Exchange) is a new United States national stock exchange launched in New York in September 2016. Since February 2017 IEX publishes free of charge their trading data in real time. These include live and historical prices of over 8,000 US stocks and mutual funds plus financial information and news.If all you want is a very quick a...
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Market Data in Excel from TrueFX

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TrueFX is a provider of real time forex rates between the most liquid currencies. Both current prices and bid/offer quotes are streamed as quoted by various brokers. If all you want is a very quick and uncomplicated way (three mouse clicks!) to simply get live feeds in your spreadsheet, check out the 30 seconds videos below:Getting easily live...
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Market Data in Excel from Alpha Vantage

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Alpha Vantage is a provider of live and historical prices of global stocks, indices and forex rates (both fiat and crypto) as well as time series of statistical indicators. If all you want is a very quick and uncomplicated way (three mouse clicks!) to simply get live feeds in your spreadsheet, check out the 30 seconds videos below:Getting...
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Market Data in Excel from Barchart

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Barchart is – among else - a provider of live and historical prices of global stocks, indices, mutual funds, futures, options and forex rates (both fiat and crypto). If all you want is a very quick and uncomplicated way (three mouse clicks!) to simply get live feeds in your spreadsheet, check out the 30 seconds videos below:Getting easily...
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Market Data in Excel from Yahoo Finance

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Yahoo Finance is a provider of market information that includes live and historical prices of global stocks, indices, mutual funds, futures, options, commodities as well as forex (both fiat and crypto) and US treasury bond rates. If all you want is a very quick and uncomplicated way (three mouse clicks!) to simply get live feeds in y...
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Market Data in Excel from World Trading Data

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*********************************************************************************************** Deprecated! This service provider has been shut down! ***********************************************************************************************World Trading Data is a provider of live and historical prices of global stocks, indices, US mutual ...
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Yahoo Finance Live Feeds in Excel after their API Discontinuation in November 2017

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On the fateful Wednesday of November 1st, 2017 Yahoo decided to stop their – until then – free service of delivering real time market data as a text stream through a special URL. For hundreds of businesses and individuals who had relied for years on Yahoo's benevolent free service, this single action meant only one thing: Instant death!If all you w...
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Using Quantos to gain exposure on Foreign Assets without the Currency Risk: Yes, but be careful!

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A common usage of quanto call options is to benefit from the price appreciation of a foreign asset and on the same time stay immune on exchange rate variations.A European style quanto call option on a foreign asset S with strike K is always cash settled and pays its holder on expiry time T the amount max{S(T) – K, 0} converted into domestic currenc...
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USD Swaption Pricing in Excel using SABR Stochastic Volatility and Market Vol Cube from CME

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The pricing of exotic interest rate products cannot ignore the so called market volatility cube that is made daily available by several swaption brokers.Traders often use the SABR Stochastic volatility model in order to estimate vols off the provided grid.In this article I will show you how to price an out-of-the-money swaption by applying SABR cal...
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USD Swaption Pricing in Excel using the Bachelier Model and Market Normal Vols from CME

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The Chicago Mercantile Exchange (CME) clears European swaption trades on 3-month USD LIBOR since April 2016 and has thus become the first major exchange that lists Over-The-Counter (OTC) interest rate products with optionality.The standardized swaption contracts have 5 different expiries - 1M, 3M, 6M, 1Y, 2Y – and 7 underlying swap tenors - 1Y, 2Y,...
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Parametric Yield Curve Fitting to Bond Prices under constraints: The National Bank of Georgia case

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Both the Nelson Siegel method and its Svensson extension are very popular among central and other banks when the time spectrum of interest rates needs to be derived from market bond prices.As I have explained in my related article, QuantLib is capable of solving the respective parametric equations treating the model parameters as unknown.Due to the...
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Accessing and Manipulating Historical Data from Yahoo Finance in Excel

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Yahoo Finance displays historical data for stock prices, indices, bond yields, fx rates, commodity prices etc on their website and allow anyone to download a text file with these data for free.If all you want is a very quick and uncomplicated way (three mouse clicks!) to simply get live feeds in your spreadsheet, check out the 30 seconds videos bel...
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Asian Option Pricing in Excel using QuantLib: Monte Carlo, Finite Differences, Analytic models for Arithmetic and Geometric Average. Example with live EUR/USD rate

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Asian options come in different flavors as described below, but to the extent they have European exercise rights they can be priced by QuantLib using primarily Monte Carlo, but under certain circumstances using also Finite Differences or even analytic formulas.The main feature of an Asian option is that it involves the average of the realized price...
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Swaption Pricing in Excel: 14 Free QuantLib Models plus Implied Volatility Surface and Cube

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Most people are unaware of the fact that free and open source QuantLib comes with a great variety of modelling approaches when it comes to pricing an interest rate European swaption in Excel that surpasses what is offered by expensive commercial products.In fact, 14 different modelling approaches are implemented, whereby the Black approach does not...
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Credit Default Swap (CDS) Pricing in Excel using QuantLib

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Free and open source QuantLib supports the precise valuation of Credit Default Swaps (CDS) in Excel. A CDS contract specifies N payment times T1, T2, …, TN at which, counterparty A (the Protection Seller) receives a pre-agreed fixed amount from counterparty B (the Protection Buyer) provided that a pre-defined credit event – such as the default of s...
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Over 30 Bond Risk Management Functions in Excel: Clean & Dirty Price, Yield, Duration, Convexity, BPS, DV01, Z-spread etc

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Free and open source QuantLib is capable of calculating several risk measures associated with the pricing of bonds and allows you to get in Excel quantities like clean and dirty price, duration, convexity, BPS, DO01, Z-spread etc.I have already showed you how to build a yield curve out of clean bond prices using either a parametric or non...
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Excel Builder and Cash Flow Viewer for Non-Standard Interest Rates Swaps

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Building, pricing and analyzing even non-standard interest rate swaps in Excel becomes a simple exercise when the Deriscope interface to the open source QuantLib analytics library is employed.We have already encountered a simple interest rate swap contract in the Yield Curve Building in Excel using Swap Rates article, where vanilla swaps were used ...
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Time for a coffee break? Understanding Time and its implications on Interest Rates

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With this article I want to give you an intuitive feeling of the concept of interest rate and also show you how to work with various types of interest rates – such as a compounded interest rate - in Excel as accurately as market professionals do.Contrary to the four-dimensional space-time of relativistic physics, financial stochastic processes evol...
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Parametric Yield Curve Fitting to Bond Prices: The Nelson-Siegel-Svensson method

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When it comes to building a yield curve out of bond prices, QuantLib can handle both non-parametric and parametric methods, both deliverable to Excel through Deriscope.The former have been demonstrated at my previous article.The latter impose a parametric form on some mathematical quantity implied by the produced yield curve.The following parametri...
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Yield Curve Building in Excel using Bond Prices (QuantLibXL vs Deriscope)

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With this article I want to show you how to create a bond yield curve in Excel, i.e. a yield curve out of bond prices, using the open source QuantLib analytics library. I will present both alternative spreadsheet interfaces to QuantLib, which are the QuantLibXL and Deriscope.The main use of a yield curve is that it allows us to calculate the p...
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Yield Curve Building in Excel using Deposits, Futures and Swaps

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With this article I want to show you how to create a yield curve in Excel using the open source QuantLib analytics library, when the input market data are a mixture of deposit rates, futures prices and swap rates.I have already written how you may build a yield curve using a single type of market instruments, such as deposits, futures or swaps...
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Yield Curve Building in Excel using Swap Rates

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With this article I want to show you how to create a yield curve in Excel using the open source QuantLib analytics library, when the input market data are swap rates. I will also show you how to apply dual bootstrapping when an exogenous yield curve is present.For short term maturities – typically less than a year – the yield curve may be built out...
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Yield Curve Building in Excel using Futures

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With this article I want to show you how to create a yield curve in Excel using the open source QuantLib analytics library, when the input market data are futures prices. The futures convexity will be taken into account.I explained how you may build a yield curve in Excel out of forward rates in my previous article.In reality, forward rates are sel...
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Yield Curve Building in Excel using Forward Rates

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With this article I want to show you how to create a yield curve in Excel using the open source QuantLib analytics library, when the input market data are forward rates.My previous article focused on building a yield curve in Excel out of deposit rates in general and Libor rates in particular.These rates cover the short range of the maturity s...
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Yield Curve Building in Excel using Deposit (LIBOR) Rates

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With this article I want to show you how to create a yield curve in Excel using the open source QuantLib analytics library, when the input market data are deposit rates – such as Libor rates -, which are a special type of interest rates called zero rates. As I describe in my article about interest rates, a deposit rate - effectively the interest ra...
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Beyond Black Scholes: American Option Price Dependence on Dividend Payment Time

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With this article I want to show you how to create and price American options on an underlying that pays dividends – such as American stock options expiring after the ex-dividend date - in Excel using the open source QuantLib analytics library.In my previous article I showed you how to calculate the fair price of an American option on an under...
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Beyond Black Scholes: American Options without Dividends

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With this article I want to show you how to create and price American options on a non-dividend-paying underlying – such as American stock options - in Excel using the open source QuantLib analytics library.America has been traditionally touted as the "land of choice" and American Options honor their name by granting their holders an additional cho...
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Beyond Black Scholes: European Options with Discrete Dividends

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With this article I want to show you how to create and price European options on an underlying that pays discrete dividends – such as European stock options - in Excel using the open source QuantLib analytics library.In my previous article I presented an overview of the QuantLib models that can be used in Excel towards pricing the simplest non-line...
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