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Volatility Arbitrage
In finance, volatility arbitrage (or vol arb) is a term for financial arbitrage techniques directly dependent and based on volatility. A common type of vol arb is type of statistical arbitrage that is implemented by trading a delta neutral portfolio of an option and its underlying. The objective is to take advantage of differences between the implied volatility of the option, and a forecast of future realized volatility of the option's underlying. In volatility arbitrage, volatility rather than price is used as the unit of relative measure, i.e. traders attempt to buy volatility when it is low and sell volatility when it is high. Overview To an option trader engaging in volatility arbitrage, an option contract is a way to speculate in the volatility of the underlying rather than a directional bet on the underlying's price. If a trader buys options as part of a delta-neutral portfolio, he is said to be ''long volatility''. If he sells options, he is said to be ''short volatil ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Finance
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of financial economics bridges the two). Finance activities take place in financial systems at various scopes, thus the field can be roughly divided into personal, corporate, and public finance. In a financial system, assets are bought, sold, or traded as financial instruments, such as currencies, loans, bonds, shares, stocks, options, futures, etc. Assets can also be banked, invested, and insured to maximize value and minimize loss. In practice, risks are always present in any financial action and entities. A broad range of subfields within finance exist due to its wide scope. Asset, money, risk and investment management aim to maximize value and minimize volatility. Financial analysis is viability, stability, and profitability asse ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Risk Neutral
In economics and finance, risk neutral preferences are preferences that are neither risk averse nor risk seeking. A risk neutral party's decisions are not affected by the degree of uncertainty in a set of outcomes, so a risk neutral party is indifferent between choices with equal expected payoffs even if one choice is riskier. For example, if offered either \$50 or a 50\% chance each of \$100 and \$0, a risk neutral person would have no preference. In contrast, a risk averse person would prefer the first offer, while a risk seeking person would prefer the second. Theory of the firm In the context of the theory of the firm, a risk neutral firm facing risk about the market price of its product, and caring only about profit, would maximize the expected value of its profit (with respect to its choices of labor input usage, output produced, etc.). But a risk averse firm in the same environment would typically take a more cautious approach. Portfolio theory In portfolio choice,Merton, ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Derivatives (finance)
The derivative of a function is the rate of change of the function's output relative to its input value. Derivative may also refer to: In mathematics and economics *Brzozowski derivative in the theory of formal languages *Formal derivative, an operation on elements of a polynomial ring which mimics the form of the derivative from calculus * Radon–Nikodym derivative in measure theory *Derivative (set theory), a concept applicable to normal functions *Derivative (graph theory), an alternative term for a line graph deva *Derivative (finance), a contract whose value is derived from that of other quantities *Derivative suit or derivative action, a type of lawsuit filed by shareholders of a corporation In science and engineering *Derivative (chemistry), a type of compound which is a product of the process of derivatization *Derivative (linguistics), the process of forming a new word on the basis of an existing word, e.g. happiness and unhappy from happy * Aeroderivative gas turbine, ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Arbitrage
In economics and finance, arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more markets; striking a combination of matching deals to capitalise on the difference, the profit being the difference between the market prices at which the unit is traded. When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-free profit after transaction costs. For example, an arbitrage opportunity is present when there is the possibility to instantaneously buy something for a low price and sell it for a higher price. In principle and in academic use, an arbitrage is risk-free; in common use, as in statistical arbitrage, it may refer to ''expected'' profit, though losses may occur, and in practice, there are always risks in arbitrage, some minor (such as fluctuation of prices decreasing profit ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Volatility Smile
Volatility smiles are implied volatility patterns that arise in pricing financial options. It is a parameter (implied volatility) that is needed to be modified for the Black–Scholes formula to fit market prices. In particular for a given expiration, options whose strike price differs substantially from the underlying asset's price command higher prices (and thus implied volatilities) than what is suggested by standard option pricing models. These options are said to be either deep in-the-money or out-of-the-money. Graphing implied volatilities against strike prices for a given expiry produces a skewed "smile" instead of the expected flat surface. The pattern differs across various markets. Equity options traded in American markets did not show a volatility smile before the Crash of 1987 but began showing one afterwards. It is believed that investor reassessments of the probabilities of fat-tail have led to higher prices for out-of-the-money options. This anomaly implies de ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Statistical Arbitrage
In finance, statistical arbitrage (often abbreviated as ''Stat Arb'' or ''StatArb'') is a class of short-term financial trading strategies that employ mean reversion models involving broadly diversified portfolios of securities (hundreds to thousands) held for short periods of time (generally seconds to days). These strategies are supported by substantial mathematical, computational, and trading platforms. Trading strategy Broadly speaking, StatArb is actually any strategy that is bottom-up, beta-neutral in approach and uses statistical/econometric techniques in order to provide signals for execution. Signals are often generated through a contrarian mean reversion principle but can also be designed using such factors as lead/lag effects, corporate activity, short-term momentum, etc. This is usually referred to as a multi-factor approach to StatArb. Because of the large number of stocks involved, the high portfolio turnover and the fairly small size of the effects one is trying to ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Implied Volatility
In financial mathematics, the implied volatility (IV) of an option contract is that value of the volatility of the underlying instrument which, when input in an option pricing model (such as Black–Scholes), will return a theoretical value equal to the current market price of said option. A non-option financial instrument that has embedded optionality, such as an interest rate cap, can also have an implied volatility. Implied volatility, a forward-looking and subjective measure, differs from historical volatility because the latter is calculated from known past returns of a security. To understand where implied volatility stands in terms of the underlying, implied volatility rank is used to understand its implied volatility from a one-year high and low IV. Motivation An option pricing model, such as Black–Scholes, uses a variety of inputs to derive a theoretical value for an option. Inputs to pricing models vary depending on the type of option being priced and the pricing m ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Hedge (finance)
A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and derivative products, and futures contracts. Public futures markets were established in the 19th century to allow transparent, standardized, and efficient hedging of agricultural commodity prices; they have since expanded to include futures contracts for hedging the values of energy, precious metals, foreign currency, and interest rate fluctuations. Etymology Hedging is the practice of taking a position in one market to offset and balance against the risk adopted by assuming a position in a contrary or opposing market or investment. The word hedge is from Old English ''hecg'', originally any fence, living or artificial. The first known use of the word ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Delta Neutral
In finance, delta neutral describes a portfolio of related financial securities, in which the portfolio value remains unchanged when small changes occur in the value of the underlying security. Such a portfolio typically contains options and their corresponding underlying securities such that positive and negative delta components offset, resulting in the portfolio's value being relatively insensitive to changes in the value of the underlying security. A related term, delta hedging is the process of setting or keeping the delta of a portfolio as close to zero as possible. In practice, maintaining a zero delta is very complex because there are risks associated with re-hedging on large movements in the underlying stock's price, and research indicates portfolios tend to have lower cash flows if re-hedged too frequently.De Weert F. pp. 74-81 Nomenclature \Delta The sensitivity of an option's value to a change in the underlying stock's price. V_0 The initial value of the option ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Long Term Capital Management
Long-Term Capital Management L.P. (LTCM) was a highly-leveraged hedge fund. In 1998, it received a $3.6 billion bailout from a group of 14 banks, in a deal brokered and put together by the Federal Reserve Bank of New York. LTCM was founded in 1994 by John Meriwether, the former vice-chairman and head of bond trading at Salomon Brothers. Members of LTCM's board of directors included Myron Scholes and Robert C. Merton, who three years later in 1997 shared the Nobel Prize in Economics for having developed the Black–Scholes model of financial dynamics.''A financial History of the United States Volume II: 1970–2001'', Jerry W. Markham, Chapter 5: "Bank Consolidation", M. E. Sharpe, Inc., 2002 LTCM was initially successful, with annualized returns (after fees) of around 21% in its first year, 43% in its second year and 41% in its third year. However, in 1998 it lost $4.6 billion in less than four months due to a combination of high leverage and exposure to the 1997 Asian financi ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Black Swan Theory
The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight. The term is based on an ancient saying that presumed black swans did not exist a saying that became reinterpreted to teach a different lesson after they were discovered in Australia. The theory was developed by Nassim Nicholas Taleb, starting in 2001, to explain: # The disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology. # The non-computability of the probability of consequential rare events using scientific methods (owing to the very nature of small probabilities). # The psychological biases that blind people, both individually and collectively, to uncertainty and a rare event's massive role in historical affairs. Taleb's "black swan theory" ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Hedge (finance)
A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and derivative products, and futures contracts. Public futures markets were established in the 19th century to allow transparent, standardized, and efficient hedging of agricultural commodity prices; they have since expanded to include futures contracts for hedging the values of energy, precious metals, foreign currency, and interest rate fluctuations. Etymology Hedging is the practice of taking a position in one market to offset and balance against the risk adopted by assuming a position in a contrary or opposing market or investment. The word hedge is from Old English ''hecg'', originally any fence, living or artificial. The first known use of the word ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
