The Black-Sholes-Merton model is a mathematical model for pricing financial options. The model is used to calculate the theoretical value of an option, which is the amount that the option holder would be paid if they exercised the option. The model takes into account factors such as the underlying asset’s …

Commodity derivatives are financial instruments whose value is based on an underlying commodity. These derivatives can be used for hedging purposes or for speculation. The most common types of commodity derivatives are futures, options, and swaps. Due to their seasonal nature, valuing commodity derivatives requires pricing models that are different …

The volatility term structure is the relationship between implied volatility and time to expiration. The term structure is important because it provides information about the market’s expectations for future volatility. For example, if the term structure is downward sloping, it means that the market is expecting implied volatility to decrease …

Pairs trading is a market-neutral trading strategy that involves buying and selling two stocks simultaneously. The idea behind pairs trading is to find two stocks that are in co-movement and to take advantage of the differential in their price movement. In order for pairs trading to be successful, you need …

An Exchange Traded Fund (ETF) is a fund that tracks an index, sector, or basket of assets just like a traditional mutual fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold. The ETF market has experienced massive …

VIX futures are a type of derivative that allow investors to bet on the future direction of the CBOE Volatility Index (VIX). The VIX is a measure of market uncertainty and is often referred to as the “fear index.” VIX futures allow investors to hedge against or speculate on future …

Beta is a measure of the volatility, or systematic risk, of a security or portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM) to calculate the expected return of an investment. A stock with a beta greater than one is …

Cointegration is a statistical property of certain types of data that indicates a strong relationship between them. When two variables are cointegrated, it means that they move together over time and tend to return to the same level after periods of divergence. This makes them ideal candidates for pairs trading, …

Derivative transactions may include collateral offered by the parties involved. These transactions require both parties to document the security provided by either one. Therefore, they may use a credit support annex (CSA). This document may give rise to a collateral choice option. Before discussing this option, it is crucial to …

A mutual fund is an investment vehicle that is made up of a pool of funds from many different investors. The money in the fund is then used to purchase a variety of different securities, such as stocks, bonds, and other assets. Mutual funds are a popular way for investors …