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Option On Realized Variance
In finance, an option on realized variance (or variance option) is a type of variance derivatives which is the derivative securities on which the payoff depends on the annualized realized variance of the return of a specified underlying asset, such as stock index, bond, exchange rate, etc. Another liquidated security of the same type is variance swap, which is, in other words, the futures contract on realized variance. With a similar notion to the vanilla options, variance options give the owner a right but without obligation to buy or sell the realized variance in exchange with some agreed price (variance strike) sometime in the future (expiry date), except that risk exposure is solely subjected to the price's variance itself. This property gains interest among traders since they can use it as an instrument to speculate the future movement of the asset volatility to, for example, delta-hedge a portfolio, without taking a directional risk of possessing the underlying asset. Defin ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Variance Swap
A variance swap is an over-the-counter financial derivative that allows one to speculate on or hedge risks associated with the magnitude of movement, i.e. volatility, of some underlying product, like an exchange rate, interest rate, or stock index. One leg of the swap will pay an amount based upon the realized variance of the price changes of the underlying product. Conventionally, these price changes will be daily log returns, based upon the most commonly used closing price. The other leg of the swap will pay a fixed amount, which is the strike, quoted at the deal's inception. Thus the net payoff to the counterparties will be the difference between these two and will be settled in cash at the expiration of the deal, though some cash payments will likely be made along the way by one or the other counterparty to maintain agreed upon margin. Structure and features The features of a variance swap include: * the variance strike * the realized variance * the vega notional: Like ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Probability Density Function
In probability theory, a probability density function (PDF), or density of a continuous random variable, is a function whose value at any given sample (or point) in the sample space (the set of possible values taken by the random variable) can be interpreted as providing a ''relative likelihood'' that the value of the random variable would be close to that sample. Probability density is the probability per unit length, in other words, while the ''absolute likelihood'' for a continuous random variable to take on any particular value is 0 (since there is an infinite set of possible values to begin with), the value of the PDF at two different samples can be used to infer, in any particular draw of the random variable, how much more likely it is that the random variable would be close to one sample compared to the other sample. In a more precise sense, the PDF is used to specify the probability of the random variable falling ''within a particular range of values'', as opposed ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Monte Carlo Method
Monte Carlo methods, or Monte Carlo experiments, are a broad class of computational algorithms that rely on repeated random sampling to obtain numerical results. The underlying concept is to use randomness to solve problems that might be deterministic in principle. They are often used in physical and mathematical problems and are most useful when it is difficult or impossible to use other approaches. Monte Carlo methods are mainly used in three problem classes: optimization, numerical integration, and generating draws from a probability distribution. In physics-related problems, Monte Carlo methods are useful for simulating systems with many coupled degrees of freedom, such as fluids, disordered materials, strongly coupled solids, and cellular structures (see cellular Potts model, interacting particle systems, McKean–Vlasov processes, kinetic models of gases). Other examples include modeling phenomena with significant uncertainty in inputs such as the calculation of ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Variance Swap
A variance swap is an over-the-counter financial derivative that allows one to speculate on or hedge risks associated with the magnitude of movement, i.e. volatility, of some underlying product, like an exchange rate, interest rate, or stock index. One leg of the swap will pay an amount based upon the realized variance of the price changes of the underlying product. Conventionally, these price changes will be daily log returns, based upon the most commonly used closing price. The other leg of the swap will pay a fixed amount, which is the strike, quoted at the deal's inception. Thus the net payoff to the counterparties will be the difference between these two and will be settled in cash at the expiration of the deal, though some cash payments will likely be made along the way by one or the other counterparty to maintain agreed upon margin. Structure and features The features of a variance swap include: * the variance strike * the realized variance * the vega notional: Like ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Volatility Swap
In finance, a volatility swap is a forward contract on the future realised volatility of a given underlying asset. Volatility swaps allow investors to trade the volatility of an asset directly, much as they would trade a price index. Its payoff at expiration is equal to :(\sigma_-K_)N_ where: *\sigma_ is the annualised realised volatility, *K_ is the volatility strike, and *N_ is a preagreed notional amount. that is, the holder of a volatility swap receives N_ for every point by which the underlying's annualised realised volatility \sigma_ exceeded the delivery price of \sigma_, and conversely, pays N_ for every point the realised volatility falls short of the strike. The underlying is usually a financial instrument with an active or liquid options market, such as foreign exchange, stock indices, or single stocks. Unlike an investment in options, whose volatility exposure is contaminated by its price dependence, these swaps provide pure exposure to volatility alone. This i ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Volatility (finance)
In finance, volatility (usually denoted by ''σ'') is the degree of variation of a trading price series over time, usually measured by the standard deviation of logarithmic returns. Historic volatility measures a time series of past market prices. Implied volatility looks forward in time, being derived from the market price of a market-traded derivative (in particular, an option). Volatility terminology Volatility as described here refers to the actual volatility, more specifically: * actual current volatility of a financial instrument for a specified period (for example 30 days or 90 days), based on historical prices over the specified period with the last observation the most recent price. * actual historical volatility which refers to the volatility of a financial instrument over a specified period but with the last observation on a date in the past **near synonymous is realized volatility, the square root of the realized variance, in turn calculated using the sum of s ... [...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 turb ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Options (finance)
In finance, an option is a contract which conveys to its owner, the ''holder'', the right, but not the obligation, to buy or sell a specific quantity of an underlying asset or instrument at a specified strike price on or before a specified date, depending on the style of the option. Options are typically acquired by purchase, as a form of compensation, or as part of a complex financial transaction. Thus, they are also a form of asset and have a valuation that may depend on a complex relationship between underlying asset price, time until expiration, market volatility, the risk-free rate of interest, and the strike price of the option. Options may be traded between private parties in '' over-the-counter'' (OTC) transactions, or they may be exchange-traded in live, public markets in the form of standardized contracts. Definition and application An option is a contract that allows the holder the right to buy or sell an underlying asset or financial instrument at a specified s ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
