Category: DERIVATIVES

Diffusive Volatility and Jump Risks

Implied volatility is an estimation of the future volatility of a security’s price. It is calculated using an option-pricing model, such as the Black-Scholes model, as it takes into account various factors including the current price of the underlying asset and its strike price. Implied volatility helps investors to gauge …

Pricing Options In The Real-World Measure

Option pricing is usually carried out in the risk-neutral world where the market participants are assumed to be indifferent between taking a certain payoff or investing in an asset with that same expected return. Mathematically, an option’s price is the expected value of its payoff in the risk-neutral measure discounted …

Do Path-Independent Volatilities Exist?

Volatility of an asset is a measure of how much the price of that asset varies over time. In other words, it is a measure of how “risky” an investment in that asset is. The higher the volatility, the greater the risk. There are two main types of volatility: historical …

Collateral Choice Option

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 …

Option Pricing Model in Illiquid Markets

Black-Scholes-Merton (BSM) is an option pricing model for valuing European options. It was developed in the 1970s by Fisher Black, Myron Scholes, and Robert Merton, of whom two were awarded the Nobel Prize in Economic Sciences in 1997 for their work. The BSM model has become one of the most …