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 …

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 …

It’s well-known that there is a strong negative correlation between the S&P 500 index and the VIX. But what exactly is the causal relationship between them? In the financial media, we often see analysts using the VIX as an indicator to time and predict market direction. Is this approach valid? …

The put-call ratio (PCR) is a popular indicator used in financial markets to gauge investor sentiment. It is calculated by dividing the number of traded put options by the number of traded call options over a specific period. The put-call ratio is often promoted and utilized by market analysts for …

VIX Exchange-Traded Products (ETPs) are financial instruments designed to provide exposure to the CBOE Volatility Index (VIX), which measures the market’s expectation of 30-day forward-looking volatility derived from S&P 500 options. VIX ETPs, such as ETFs and ETNs, allow investors to gain exposure to volatility without directly trading options or …

Linear regression is a widely used prediction technique in finance. Linear regression can estimate the relationship between a dependent variable (such as stock price) and one or more independent variables (like market indices or economic indicators). This approach is particularly useful in predicting trends, asset prices, and risk factors. However, …

Credit risk refers to the potential for financial loss if a borrower fails to meet their debt obligations, such as repaying a loan or bond. Credit risk assessment involves evaluating the likelihood of default, often using financial metrics, historical performance, and credit ratings. Effective management of credit risk includes diversifying …

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 …

Tactical Asset Allocation (TAA) is an active investment strategy that involves adjusting the allocation of assets in a portfolio to take advantage of short- to medium-term market opportunities. Unlike strategic asset allocation, which focuses on long-term asset allocation based on a fixed mix, TAA seeks to exploit market inefficiencies by …

The Random Walk Hypothesis (RWH) suggests that stock prices move in a completely unpredictable manner, making it impossible to consistently outperform the market through stock selection or market timing. According to this hypothesis, changes in stock prices are independent of each other and follow a random path, meaning past price …