TMC #7! Markets are nothing else than a mechanism to aggregate a bunch of probabilistic scenarios and weigh them into one price: so, what are we pricing in today?
Hi Alfonso, your website is teaching me a lot- thank you! Does the pricing for long term UST yields basically tend to follow the cumulative Forward OIS rates for the corresponding time period e.g. UST 10y is basically al the forward OIS rates from 0 to 10 years? Thanks!
It would be great if you could share how you calculate the implied probabilities in more detail as suggested in other comments below. Keep up the good work! Really enjoy your substack
Enjoyed reading all your articles Alonso! Given that the option-implied probabilities were backed out based on the cost of various spreads, would the sum of the option-implied probabilities at all strikes add up to 1?
Thank you for the great post. Wondering if you could share the method used in calculating the implied probability. It would be great if you could shed some light on whether such method can be used effectively in the FX market.
Wonderful article Alonso. One question and one conment.
You use the option market for equities but not for rates ( where you use OIS). Why?
The problem with using options for equities is that will introduce bias in your estimates. A delta one long position hedged with puts is tax advantaged relative to a sale transaction that generates ( taxable) capital gains.
Absolute gold, thanks Alfonso. You said you wouldn't bore us, but actually I'm really interested in calculating option-implied probabilities like you did to produce your chart. Please could you provide a pointer to get started? Thanks again!
Hi Alfonso, your website is teaching me a lot- thank you! Does the pricing for long term UST yields basically tend to follow the cumulative Forward OIS rates for the corresponding time period e.g. UST 10y is basically al the forward OIS rates from 0 to 10 years? Thanks!
You are very informative!! I believe there are other factors that could be considered to derive a better result
Very interesting analysis and well written
It would be great if you could share how you calculate the implied probabilities in more detail as suggested in other comments below. Keep up the good work! Really enjoy your substack
Hey Alf. Love your works. The clarity of your writing is superb.
Beeing a Montary/ finatial noob I am learning a great deal.
In some of the articles you are using specific terms that are domain specific.
An example here is OIS and that great you explained the term.
But still there are plenty of such examples that will come up again and again.
ie. alpha beta gamma delta ffr ois …
Some the perspective someone that is learning and do this on an adhoc basis.
I’ll most likely forget the meaning of terms terms a couple of times before they sink in.
So it probably would benefit me the reader and you as the author so that you won’t have to repeat these explanations.
If this makes sense to you think about adding a “glossary” article / page with proper href references for u to use in other articles
Ie.
Tmc.substack.com/terms/#ois
Best of luck on your efforts.
regards Maciej
Thanks Alfonso, really good post! May I ask which Bloomberg tickers you use for the forward OIS rates, please?
Enjoyed reading all your articles Alonso! Given that the option-implied probabilities were backed out based on the cost of various spreads, would the sum of the option-implied probabilities at all strikes add up to 1?
Thank you for the great post. Wondering if you could share the method used in calculating the implied probability. It would be great if you could shed some light on whether such method can be used effectively in the FX market.
Wonderful article Alonso. One question and one conment.
You use the option market for equities but not for rates ( where you use OIS). Why?
The problem with using options for equities is that will introduce bias in your estimates. A delta one long position hedged with puts is tax advantaged relative to a sale transaction that generates ( taxable) capital gains.
Absolute gold, thanks Alfonso. You said you wouldn't bore us, but actually I'm really interested in calculating option-implied probabilities like you did to produce your chart. Please could you provide a pointer to get started? Thanks again!