The CBOE has also introduced volatility derivative products based on the index. Corrado and Miller (2005) compare the forecast quality of implied volatility indexes to historical volatility, and they find VIX outperforms historical volatility in forecasting future realized volatility. Similar result is found by Zhang (2006), who show that VIX outperforms GARCH volatility estimated from the S&P 500 index returns. A very important feature of VIX is that VIX tends to be higher when the stock market drops, for example, VIX was particularly high during the last quarter of 2008, when the stock market tumbled. Whaley (2009) explains why VIX is a useful “market fear gauge”: when stock market is expected to fall, investors will purchase the S&P 500 put options for portfolio insurance.
In 1993, the Chicago Board Options Exchange introduced the CBOE Volatility Index (VIX) which measured the 30-day implied volatility from at-the-money options of the S&P 100. In 2003 CBOE and Goldman Sachs updated the VIX. Now the new VIX is based on the S&P 500 index and estimates the expected volatility by averaging the weighted prices of S&P 500 puts and calls over a large range of strike prices and at two nearby maturities. CBOE used this methodology and back-calculated the VIX since 1990 using historical options price. The CBOE Dow Jones Industrial Average volatility index (VXD) and CBOE Nasdaq-100 volatility index (VXN) were introduced at 1997 and 2001 respectively.
Activity I: a. the bank 's specific cash market risk is dependent on the increase in the interest rate because the interest rate in the futures market is a function of the interest rate in the cash market. It is calculated as follows: Cash Market Risk = 10000000 * 0.0461*(90/365) = $113,671.23 To hedge against the borrowing costs, the bank should sell Eurodollar futures because the futures interest rate is up trending. By doing so, any increase in the cash market interest rate would be matched in the futures market interest rate to offset any gain or loss on the scheduled issue of Eurodollar futures b. The best futures contract for the bank to use is June 2009 because it has the higher interest rate of 5.38%. The profit on the futures trade is calculated as follows: Profit =
Also, while SPX had a drawdown in 2008, Crabel fund spiked in the opposite direction. Hence,if put together negative volatility of a portfolio would be decreased. We can see positive skewness of .53 in Crabel’s graph since it’s spiking up followed by further increase in
There is also no interest charged on the asset. Liquidity – The seller is assured that this asset will be converted into quick cash with ease because the contract is sealed. Reduces Counter Party Risk – Future contracts reduces the chances of either party defaulting when a better offer is placed on the table. PRICING OF FUTURE CONTRACTS Pricing of future contracts can be done in a number of ways but two simple pricing models for futures contracts can be used to estimate how the price of a stock futures or index futures. These are; The Cost of Carry Model The Expectancy Model The Cost of Carry Model Futures pricing according to cost of carry model has two assumptions.
Flexibility to change the fund allocation: Also Ulips give you the option to change the fund allocation at a later stage through switching fund facility. c. Flexibility to invest more via top-Ups: Unlike traditional plans Where you 've to invest in 'FIXED ' premium every year, Ulips allow you flexibility to invest more than the normal premium top-ups via Which additional investments are over and above the normal premium. To Understand the significance and mystery of top-ups, please read "5 ULIP Secrets". For the purpose of tax deduction under section 80C, there 's no difference Between Regular premium and top-ups. In other words, top-ups are allowed Also
During the time of the contract, money is not allowed to flow. However, the contract makes it possibly to ignore any changes in exchange rate. Consequently, the existence of a forward market make it likely to hedge an exchange position. The important foreign exchange instruments such as telegraphic transfer, foreign bills of exchange, letter of credit, bank draft and others used in the foreign exchange market to carry out its
INTRODUCTION: Volatility is one the most important variable in finance. It involves wide categories of theories and application in risk management, derivatives, assets pricing, portfolio theory, financial econometrics and investment derivatives. Because of the nature of volatility as it continuously changes over time this makes the volatility as latent variable i-e variable that cannot be directly measured or observed. Different research and academic methods have adapted to measure volatility. Changes in volatility arises volatility risk.
1.1 Research Background Volatility can be defined in several terms. Statistically, it refers to a level of uncertainty or variation of financial assets varying over time, which measured by standard deviation or variance (Baybogan, 2013). It is commonly applied in order to evaluate the risk of financial assets. Generally, assets with high volatility, the prices of these assets could dramatically fluctuate in a wider range over a short period of time. In the other word, it can be said that a higher volatility implies a higher risk of assets.
(Alexander)Volatility is the annualized standard deviation of the returns on an investment. Volatility has major role to play in the stock markets. The heart pulse of every stock broker, I must say. The key determinant in deciding the profitability of a stock broker is volatility. If volatility persists, the broker is going to gain or lose.