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Are Airline Pilots Good Risk Managers?

Posted on December 22, 2024 By 
Due to technological advancements, air travel has never been safer. However, despite all these new technologies, one constant remains: the human factor. Specifically, the most critical individuals are the pilots. Unless we develop pilotless airplanes, a possibility that won’t materialize anytime soon, pilot behaviour remains essential. Do pilots maintain a …
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Trading Volatility Skew: Can Forecasts Increase Returns?

Posted on December 18, 2024 By 
Volatility skew refers to the observed pattern where implied volatility varies depending on the strike price of an option. Typically, in equity markets, out-of-the-money (OTM) put options exhibit higher implied volatility than at-the-money (ATM) or out-of-the-money call options. This phenomenon reflects market participants’ demand for protection against downside risks, as …
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Illiquidity Premium in the Bitcoin Options Market

Posted on December 10, 2024 By 
Sometimes, investors come across trading opportunities that offer outsized returns, but they may not fully understand the risks they are taking on. These risks can include operational risks, counterparty credit risks, or hidden optionality within a financial note. Reference examines the role of liquidity risks in the returns of …
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Net Gamma Exposure in International Markets

Posted on December 6, 2024 By 
Net Gamma Exposure (NGE) and its effect on stock prices has been an active research topic recently. Reference applied this concept to the Chinese stock market, studying the NGE effect on intraday stock direction and the relationship between futures and options. Specifically, the paper presents evidence supporting the idea …
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Incorporating Memory and Stochastic Volatility into Geometric Brownian Motion Model

Posted on December 2, 2024 By 
Geometric Brownian Motion (GBM) is a widely used mathematical model for simulating the random behavior of asset prices in financial markets. It assumes that the price of an asset follows a continuous-time stochastic process, where the logarithmic returns are normally distributed. GBM is foundational in option pricing models like Black-Scholes-Merton. …
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How Will Bitcoin ETF Options Impact The Markets?

Posted on November 28, 2024 By 
Bitcoin ETF options started trading last week. The debut of Bitcoin ETF options was met with significant bullish sentiment, as over 80% of trades were call options. Investors exhibited strong optimism about Bitcoin’s future price, with many purchasing options at a strike price of $100,000. This launch marks an important …
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Reexamining the Performance of Passive Options Strategies

Posted on November 24, 2024 By 
More than 40 years ago, Merton et al. published two papers examining the performance of passive options strategies. They concluded that these strategies outperformed the traditional buy-and-hold approach. At the time of their studies, options data was not widely available, so they used historical volatility to calculate options prices. …
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Hedging Vega Risks with Delta

Posted on November 20, 2024 By 
Delta hedging is a risk management strategy used to neutralize the impact of price movements in the underlying asset of an option. It involves adjusting the position in the underlying asset to offset the sensitivity of the option’s value, measured by its “delta.”  Delta represents the rate of change in …
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No-arbitrage Model for Pricing CAT Bonds

Posted on November 16, 2024 By 
Catastrophe bonds, or CAT bonds, are a type of risk-linked security designed to transfer the financial risk of natural disasters from insurers to investors. These bonds are typically issued by insurance or reinsurance companies to cover significant losses caused by events such as hurricanes, earthquakes, or floods. Investors in CAT …
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