Short Volatility Funds Lost Money During The Pandemic

Posted on August 27, 2020 By Harbourfront Technologies

With a sudden increase in volatility during the pandemic, many volatility funds lost money. Many funds were struck because they adopted a strategy known as shorting volatility — betting that it will fall or remain low. Such funds sell derivative protection such as put options, which give the buyer the …

Banks Hold Many Illiquid Assets

Posted on August 25, 2020 By Harbourfront Technologies

The trend in the increased holding of risky assets continues. Because of Covid-19, the big banks now hold more illiquid, opaque assets than before. Lenders including Barclays Plc, Citigroup Inc., BNP Paribas SA and Societe Generale SA reported a surge of more than 20% in their most opaque assets during …

Convertible Bond Issuance Has Increased

Posted on August 22, 2020 By Harbourfront Technologies

Convertible bond issuance has increased during the Covid 19 pandemic. From a funding perspective, convertible bonds have many attractive features for corporates, which have become more important during the pandemic. …In volatile markets, the value of the embedded option in a convertible bond increases. The asset class also becomes more …

How to Forecast Implied Volatility

Posted on August 20, 2020 By Harbourfront Technologies

How do you determine the volatility of an unlisted entity, and more generally, how do you forecast volatility? These are non-trivial questions. There is an interesting discussion on Stackexchange: Here is a question I had for a long time but I never asked. Let’s take an easy example, AirBnb will …

Valuation of Warrants-Derivative Pricing in Python

Posted on August 18, 2020 By Harbourfront Technologies

A warrant is a financial derivative instrument that is similar to a regular stock option except that when it is exercised, the company will issue more stocks and sell them to the warrant holder. Warrants and options are similar in that the two contractual financial instruments allow the holder special …

Impact of a Low Correlation Trading Strategy

Posted on August 17, 2020 By Harbourfront Technologies

When constructing a portfolio, adding a low correlation, low Sharpe ratio strategy can have the same impact as adding a high Sharp ratio strategy. The low correlation strategy is a great diversifier. The core argument presented in this paper –that SR is a misleading index of whom a fund should …

Performance Share Units-Derivative Valuation in Python

Posted on August 5, 2020 By Harbourfront Technologies

In a previous post, we wrote about Employee Stock Options, a form of financial compensation that a company uses to reward its employees. In this post, we are going to discuss another form of compensation, Performance Share Units. Performance share units (PSUs) are hypothetical share units that are granted to …

Employee Stock Options-Derivative Pricing in Python

Posted on July 30, 2020 By Harbourfront Technologies

Employee Stock Option (ESO) is a form of compensation that a company uses to reward, motivate, and retain its employees. An employee stock option (ESO) is a label that refers to compensation contracts between an employer and an employee that carries some characteristics of financial options. Employee stock options are …

Valuing American Options Using Monte Carlo Simulation –Derivative Pricing in Python

Posted on July 24, 2020 By Harbourfront Technologies

In a previous post, we presented the binomial tree method for pricing American options. Recall that an American option is an option that can be exercised any time before maturity. A drawback of the binomial tree method is that the implementation of a more complex option payoff is difficult, especially …

Garman-Klass-Yang-Zhang Historical Volatility Calculation – Volatility Analysis in Python

Posted on June 30, 2020 By Harbourfront Technologies

In the previous post, we introduced the Garman-Klass volatility estimator that takes into account the high, low, open, and closing prices of a stock. In this installment, we present an extension of the Garman-Klass volatility estimator that also takes into consideration overnight jumps. Garman-Klass-Yang-Zhang (GKYZ) volatility estimator consists of using …