The Implied Volatility Surface (IVS) represents the variation of implied volatility across different strike prices and maturities for options on the same underlying asset. It provides a three-dimensional view where implied volatility is plotted against strike price (moneyness) and time to expiration, capturing market sentiment about expected future volatility. Unlike …

VIX futures are financial derivatives that allow traders to speculate on or hedge against future volatility in the stock market, specifically the S&P 500 index. They are based on the CBOE Volatility Index (VIX), which measures market expectations of near-term volatility. Unlike spot VIX, which reflects current market volatility, VIX …

The Hull-White one-factor (1F HW) interest rate model is a widely used model in finance for simulating the evolution of interest rates over time. It is based on a mean-reverting stochastic process where short-term interest rates revert to a long-term mean at a certain speed. The model incorporates two key …

A convertible bond is a type of hybrid security that acts like a traditional bond but includes an option to convert the bond into a predetermined number of shares of the issuing company’s stock. This feature offers investors the potential to benefit from rising stock prices while providing downside protection …

Dividend futures are financial derivatives that allow investors to speculate on or hedge against the future dividend payments of a specific company or index. Unlike traditional equity futures, which are based on the price of the underlying asset, dividend futures are directly linked to the dividends that a company or …

A common belief in strategy design is that ‘more data is better.’ But is this always true? Reference examined the impact of the quantity of data in predicting realized volatility. Specifically, it focused on the accuracy of volatility forecasts as a function of data sampling frequency. The study was …

Airbag options are a new structured product that has gained popularity among investors in the over-the-counter derivatives market. They offer protection against downside losses, similar to how an airbag protects in a car crash. Airbag options provide investors with downside risk protection in the event of a market “collision.” However, …

A Credit Default Swap (CDS) is a financial derivative that allows investors to hedge or speculate on the credit risk of a borrower, such as a corporation or government. In a CDS contract, the buyer of the swap makes periodic payments to the seller in exchange for protection against the …

The volatility risk premium (VRP) is the compensation investors receive for bearing the risk associated with fluctuations in market volatility, typically measured as the difference between implied and realized volatility. The VRP in equities has been studied extensively. However, relatively little attention has been paid to the VRP in other …

We have discussed at length the implied volatility and its relationships with realized volatility, volatility skew, dividend yield, and correlations. Moreover, it is interesting to examine implied volatility from a behavioural finance perspective. Reference studied the relationship between various countries’ implied volatilities and their cultural characteristics. Specifically, it utilized …