[R-SIG-Finance] Pricing guaranteed execution

Christian Prinoth Christian.Prinoth at epsilonsgr.it
Fri Dec 11 17:04:23 CET 2009


I don't have much direct experience on this issue, but I guess you would
take into account:
- distribution of intraday volumes
- expected tracking error volatility of the basket to be traded
(relative to whatever hedging instruments your desk has)

For instance, a sell side trading desk would price a risk trade so that
they do not lose in the worst case scenario setting price equal to
expected loss (which might be estimated by 2*expected tracking error of
the portion of the basket that they are unable to readily hedge).

Christian Prinoth <cp at epsilonsgr.it>
Epsilon SGR
+39-02-88102355


> -----Original Message-----
> From: r-sig-finance-bounces at stat.math.ethz.ch
> [mailto:r-sig-finance-bounces at stat.math.ethz.ch] On Behalf Of
> R_help Help
> Sent: 11 December, 2009 16:38
> To: markleeds at verizon.net; r-sig-finance at stat.math.ethz.ch
> Subject: Re: [R-SIG-Finance] Pricing guaranteed execution
>
> Mark - Not really. Let me explain the setting a bit. You receive says
> a day order of 1mio shares of stock XYZ. You guarantee client
> execution price using some benchmark such as VWAP price of the day. In
> return, you'll charge them for markup to compensate your risk. Just
> wondering if anybody has put any thoughts on such a problem on how to
> come up with this markup. Thanks.
>
> On Mon, Dec 7, 2009 at 11:29 PM,  <markleeds at verizon.net> wrote:
> > I doubt I can help but I'm not sure that I understand your
> question. Are you
> > trying to simulate a strategy and
> > buying and selling intraday ?
> >
> >
> > On Dec 7, 2009, R_help Help <rhelpacc at gmail.com> wrote:
> >
> > Well thanks Mark. My order horizon is usually much longer. So I'm
> > wondering if there's any framework for pricing such executions that
> > people have put thoughts on so far? Thanks.
> >
> > On Mon, Dec 7, 2009 at 11:11 PM, <markleeds at verizon.net> wrote:
> >> hi: you could assume the offer quote on a buy and the bid
> quote on a sale
> >> but even that's not guaranteed if you don't
> >> get there first.
> >>
> >>
> >>
> >> On Dec 7, 2009, R_help Help <rhelpacc at gmail.com> wrote:
> >>
> >> Hi,
> >>
> >> Sorry. This is probably not an R question. But I'd like to
> know if one
> >> were to guarantee execution. Is there any framework to price the
> >> markup? Thank you.
> >>
> >> rhelp
> >>
> >> _______________________________________________
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>
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