...Market Volatility: Measures and Results Gary E. Mullins, Ph.D. University of Wisconsin - Stevens Point | | IntroductionVirtually everyone who is interested in financial markets seems to agree on two things: that markets are now more volatile than ever, and that volatility causes many problems. Let's look at some recent and not-so-recent articles concerning volatility. This week turned out to be slower than expected on the IPO market, as intense volatility on U.S. exchanges prompted many companies to put off much-anticipated debuts. I am writing to you today to address my concerns about trading in a fast market, a current issue of extreme importance to me. I want to give you my perspective and let you know the steps we at Schwab are taking to support investors during this time of market volatility. In recent months, there has been a marked increase in price volatility and volume in many stocks, particularly of companies that sell products or services via the Internet (Internet issuers). In the above quotes, there are two implicit assumptions: that volatility is higher now than it has been in the past, and that this volatility is somehow bad. In the first article, it assumes that (obviously) increased volatility has caused firms to delay their Initial Public Offerings (IPO's). Next, Schwab believes that investors need special support because of the high volatility inherent in today's market. Finally, Barrett appears to be more concerned about volatility for Internet...
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...Ibrahim Nasser Khatatbeh May, 2013 Q1: Explain how the option pricing formula developed by black and scholes can be used for common stock and bond valuation. Include in your discussion the consequences of using variance applied over the option instead of actual variance. Its generally known that Black and Scholes model became a standard in option pricing methods , with almost everything from corporate liabilities and debt instruments can be viewed as option (except some complicated instruments), we can modify the fundamental formula in order to fit the specifications of the instrument that will be valued. An argument done by Black and Scholes which was based on the past proposition of Miller and Modigliani a well as assuming some ideal conditions, States that value of the firm is a sum of total value of debt plus the total value of common stock. As well as the fact that in the absence of taxes, the value of the firm is independent of its leverage and the change of debt has no effect on the firm value. V = E + Dm V: value of the firm. E: shareholders right (common stock values). Dm: market value of the debt. As the above equation impose that Equity (common stock values) can be viewed as a call option on the firm value (due to the shareholders limited liability and with consideration that firm debt can be represent as a zero-coupon bond), where exercising the option means that equity holders buy the firm at the face value of debt (which is in this case will be...
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...conditional heteroskedasticity, the implied volatility smile, and the variance risk premium Louis H. Ederington a,⇑, Wei Guan b a b Finance Division, Michael F. Price College of Business, University of Oklahoma, 205A Adams Hall, Norman, OK 73019, USA College of Business, University of South Florida St. Petersburg, 140 Seventh Avenue South, St. Petersburg, FL 33701, USA a r t i c l e i n f o a b s t r a c t This paper estimates how the shape of the implied volatility smile and the size of the variance risk premium relate to parameters of GARCH-type time-series models measuring how conditional volatility responds to return shocks. Markets in which return shocks lead to large increases in conditional volatility tend to have larger variance risk premia than markets in which the impact on conditional volatility is slight. Markets in which negative (positive) return shocks lead to larger increases in future volatility than positive (negative) return shocks tend to have downward (upward) sloping implied volatility smiles. Also, differences in how volatility responds to return shocks as measured by GARCH-type models explain much, but not all, of the variations in excess kurtosis and multi-period skewness across different markets. Ó 2013 Elsevier B.V. All rights reserved. Article history: Received 11 October 2012 Accepted 14 April 2013 Available online 17 May 2013 JEL classification: G13 G10 G12 Keywords: Implied volatility Volatility smile Variance risk premium GARCH Conditional...
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...rate tree (where each step is = 0.5): 1 1.20% 2.76% 0.64% 2 4.32% 2.20% 0.08% Table 2- Ho-Lee interest rate tree 3 5.88% 3.76% 1.64% -0.48% At each node, the interest rate was calculated using ������������+1,������ = ������������,������ + ������������ × ∆ + ������ × √∆ For upward movements, and ������������+1,������+1 = ������������,������ + ������������ × ∆ − ������ × √∆ For downward movements. The risk neutral probability of an upward or downward movement is set at p*=1/2. The model implied zero-coupon prices are then computed using the different step bond trees (Table 14 in the Appendix). The following table shows the comparison between the implied and the term structure zero-coupon prices for each maturity: the Check row contains the difference between the two. 1 Term structure Implied Check 99.4018 99.4018 0.0000 2 98.4127 98.5618 -0.1491 3 97.0446 97.4891 -0.4445 4 95.6954 96.1940 -0.4986 Table 3 - Comparison on bond prices We can see that the implied Ho-Lee zero-coupon bond prices do not agree with the observed term structure, due to the arbitrary Ɵ values. C. In order to find the drift parameters that exactly fit...
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...O N R E G A R D I N G F O R W A R D - L O O K I N G S T A T E M E N T S , R I S K S A N D A S S U M P T I O N S This MD&A includes “forward-looking information” within the meaning of applicable securities laws and assumptions concerning, among other things our business, its operations and its financial performance and condition approved by management on the date of this MD&A. This forward-looking information and these assumptions include, but are not limited to, statements with respect to our objectives and strategies to achieve those objectives, as well as statements with respect to our beliefs, plans, expectations, anticipations, estimates or intentions. This forward-looking information also includes, but is not limited to, guidance and forecasts relating to revenue, adjusted operating profit, property, plant and equipment expenditures, cash income tax payments, free cash flow, dividend payments, expected growth in subscribers and the services to which they subscribe, the cost of acquiring subscribers and the deployment of new services, and all other statements that are not historical facts. The words “could”, “expect”, “may”, “anticipate”, “assume”, “believe”, “intend”, “estimate”, “plan”, “project”, “guidance”, and similar expressions are intended to identify statements containing forward-looking information, although not all forward-looking statements include such words. Conclusions, forecasts and projections set out in forward-looking information...
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...Article Rebuttal BCOM/275 1/27/2014 Article Rebuttal “A well-regulated militia, being necessary to the security of a free state, the right of the people to keep and bear arms, shall not be infringed” (U.S. Const., am 2). Since the ratification of the Bill of Rights, including the Second Amendment in 1791, our right to bear arms has been under attack. This article rebuttal will focus on an USA Today article titled “Epidemic: Guns kill twice as many kids as cancer does.” This article attempts to use biased statistics to provoke demand for further restrictions against our second amendment right. In the article, the author provides some staggering statistics which he uses to substantiate the claim “guns kill”. Here are a few; “guns still kill twice as many children and young people than cancer, five times as many than heart disease and fifteen times more than infection, according to the New England Journal of Medicine.” The article goes on to state “in 2010, 15,576 children and teenagers were injured by firearms – three times more than the number of U.S. soldiers injured in the war in Afghanistan, according to the defense fund.” On the surface, these statistics are alarming. Beyond the statistics, the article makes the claim “guns kill”. The remainder of this rebuttal will put into perspective the statistical claims on gun related deaths among youth, as well, debunk the implication “guns kill”. First, let’s place a level of perspective on the statistical...
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...Wolfgang Iser’s The Act of Reading: Implied Reader Wolfgang Iser’s The Act of Reading presents a list of the various types of readers possible when it comes to interpreting literary text. These readers have different interpretations of the text. These interpretations are affected by how the author appeals to each of the readers, either through the text itself or through the beliefs that the reader brings to the text. One reader Iser focuses on is the implied reader. After carefully examining what an implied reader is, Iser’s main assumptions about this role are easily noticeable. Iser’s implied reader allows the text to be broken down in such a way that the structured effects of a text can be described. Also, the implied reader allows for all predispositions to be mentioned so the text can achieve its meaning effectively. In fact, Iser says it best when he writes the implied reader “embodies all those predispositions necessary for a literary work to exercise its effect.” An implied reader is a part of the text. And this part is extremely imperative to the text. Iser himself states that this implied reader concept “designates a network of response- inviting structures, which impel the reader to grasp the text.” In other words, the implied reader is a backbone to a person reading the text. Without the implied reader, the text will have no sufficient value present. Iser’s implied reader also has structured acts which help...
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...Course Hero has millions of student submitted documents similar to the one below including study guides, practice problems, reference materials, practice exams, textbook help and tutor support. Ernst 1. & whinney never issued an audit opinion on the financial statements of ZZZZ Best; however, Ernst & Whinney did issue a review report on the companys quarterly statements for the three months ending July 31, 1986. How does a review differ from an audit, particularly in terms of the level of assurance implied by the auditors report ? Ernst & Whinney resigned as ZZZZ Bests auditor on June 2, 1987, following a series of disturbing events that caused the firm to question the integrity of M inkow and his associates. First, Ernst & Whinney was alarmed by a Los Angeles Times article in mid-May 1987 that revealed Minkow had been i nvolved in a string of credit card forgeries as a teenager. Second, on May 28, 1987, ZZZZ Best issued a press release, without consulting or notifying Ernst & Whinney, that reported record profits and revenues. The purpose of this press release was to restore in vestors confidence in the companyconfidence t hat had been shaken by the damaging Los Angeles Times story. Third, and most important, on May 29, Ernst & Whinney auditors discovered evidence supporting allegations made several weeks earlier by a third party informant t hat ZZZZ Bests insurance restoration business was fictitious. The informant had contacted Ernst & Whinney in April 1987 and asked for $25...
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...evident at the technological pinnacle of this world — the high performance UCAV. But, even here, there are likely to be challenges to conventional attitudes and processes. We further conclude that despite movement on the collabo- rative front, Europe could still struggle to make headway in the market unless industry is able to embrace the new ways of doing business implied by the UAS transformation. This includes the need to encourage new entrants as well as adopting a full systems approach to the market, offering an integrated package of hardware and services to a range of civil and military customers. In this respect, the paper urges the rapid adoption and implementation of the June 2013 EU Roadmap for the integration of UAS operations into European airspace. The Revolution in Military Affairs — these days often known as military transformation — with its emphasis on network centric warfare and exotic weapons systems, has threat- ened a comparable revolution in defence industrial affairs. The proposition is that the fundamental changes in defence technology implied by military transformation will challenge the existing structure of defence companies, encourage new entrants and new combinations of players, especially from the wider civilian high technology community to enter the defence business. Yet a decade or more since this mantra was first rehearsed — and taken up in official studies in the US, the UK and else- where, the...
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... 3. Can Internet use and e-mail use policies be covered in an acceptable use policy? * Yes they can! Because it’s for the safety of employees and the organization itself. * It’s so the organization is protected at all times. 4. Why is an acceptable use policy not a fail-safe means of mitigating risks and threats within the User Domain? * Because you cannot control the User Domain. 5. Will the AUP apply to all levels of the organization? Why or why not? * Yes it will apply to all levels of the organization (from the lower level to the executive level). * Because the AUP is there for the benefit for everyone and everything related to the organization. So even if you are the janitor or the CEO, they are still implied by the AUP....
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...(#5-913-546). Please answer the questions, and also provide associated spreadsheet tables and work (for your final output). Read the whole case but pay special attention to plans 2 and 4 as they will be the focus of the questions. Plan 4: Invest in the Core 1) Assume that sales would go down by 4% for RTE cans in 2013 in the absence of this plan. Compute that counterfactual sales (quantities and revenue) and profit. 2) Compute profit under the lower and upper bound assumptions on sales increases, including the increased marketing costs. 3) What minimum quantity do you need to sell to make the plan break even? For the next set of questions, use the quantity you computed in question 3. 4) Compute the change in demand due to his plan. 5) Compute the implied retail elasticity assuming a retail margin of 35% and perfect pass through of the price change. 6) Imagine that the ad campaign was responsible for 20% of the increased sales. Compute the same price elasticity as in question 5. 7) Do you want to proceed with the advertising campaign? 8) Would you want to proceed with mondernizing the plant? 9) Which parts of this plan seem to make sense or not make sense to you? What are the crucial numbers in determining this and are there other statements in the case that might inform whether these numbers seem reasonable or not? 10) What do you see as some of the advantages / disadvantages of this plan relative to the other plans? Plan 2: Acquire Red Dragon Here we are going to compute the return on investment...
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...provide direct evidence of the gradual information diffusion model in Hong and Stein (1999). Consistent with their theory, we show that a successful identification of stocks’ information diffusion stage helps explain momentum profits. We are able to enhance momentum profits by longing winner stocks with higher growth (and shorting loser stocks with larger drop) in call options implied volatility. Our empirical strategy generates a risk-adjusted alpha of 1.8% per month for a hedged winner-minus-loser portfolio over the 1996–2011 period, during which the simple momentum strategy fails to perform. The results are stronger and clearer if we use call options compared with put options, which are consistent with managers’ tendency to reveal good news and hide bad news. Our results are robust to transaction costs, choice of options’ moneyness, elimination of implied volatility persistence, and choice of options’ time-to-maturity. Finally, our results are not driven by existing stock-level characteristics, such as size, trading volume, and analyst coverage. JEL Classification: G10, G11, G12, G13 Keywords: Momentum, Implied Volatility PBC School of Finance, Tsinghua University. Email: chenzh@pbcsf.tsinghua.edu.cn. Tel: +86-1062781370. † Department of Finance, University of Melbourne. Email: andrea.lu@unimelb.edu.au. Tel: +61-449566225. For helpful comments and discussions, the authors thank Torben Andersen, Snehal Banerjee, Zhi Da, Stephen Figlewski, Kathleen Hagerty, Ravi Jagannathan, Robert Korajczyk...
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...01.1. In a plot of the volatility smile, what are each of the axes and how is the function line plotted? Y axis is implied volatility. X axis is strike price (K), K/S, K/Forward, or option delta. The line plots volatility (sigma) that, given an observed market price (c), solves for option price (c) = BSM[S,K, sigma, T,rho,(q)]. There is not an analytical solution, we must iterate (goal-seek) to solve for the volatility that returns a model price equal to observed market price. 01.2. Identify the axes in a plot of the (i) volatility term structure and (ii) volatility surface. (i) Implied volatility versus option term (ii) Three dimensions: implied volatility (Y axis) versus strike or K/S (X axis) versus term (Z axis) 01.3 Which is consistent with the lognormal price distribution (GBM) that underlies classic Black-Scholes Merton: volatility smile or volatility skew? Neither! a horizontal line (Y-axis = implied volatility and X-axis = strike price) is consistent with the lognormal price distribution. A smile (i.e., high implied volatility for OTM puts and calls) implies heavier tails, while a skew (i.e., high implied volatility for ITM call/OTM put and low implied volatility for OTM call/ITM put) implies heavy left tail and light right tail. 01.4 True or false: the implied option volatility smile should be the same for all market participants (traders). False. implied volatility, by definition, is model-dependent. It varies with the model employed. Only...
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...d2 = 0.5379 – 10%*√1 = 0.5379 – 0.1 = 0.4379 N(d2) = 0.66927061 e-rcT = e-0.04879*1 = 0.952381 C0 = 50*0.70467695 – 50*0.952381*0.66927061 = 35.2338475 – 31.8700306 = 3.3638 2. Solve the value of the above one-year American call using CBOE Options Toolbox [pic] 3. Noting the Greek values: How will the call value change for a. 1% change in interest rate [pic] b. $1 increases in the stock price [pic] c. Reduction of one-day in maturity [pic] 4. All options are European and the stock does not pay a dividend. Which option is relatively more expensive? Explain. (Hint: Compute implied volatility). a. S = $50, C (X=$60) =$14 [pic] b. S = $50, C (X=$65) =$10 [pic] Option (a) is relatively more expensive because the higher Implied...
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...(2002) 45–60 INSTITUTE O F PHYSICS PUBLISHING RE S E A R C H PA P E R quant.iop.org Dynamics of implied volatility surfaces Rama Cont1,3 and Jos´ da Fonseca2 e Centre de Math´ matiques Appliqu´ es, Ecole Polytechnique, F-91128 e e Palaiseau, France 2 Ecole Superieure d’Ingenierie Leonard de Vinci, F-92916 Paris La D´ fense, e France E-mail: Rama.Cont@polytechnique.fr and jose.da fonseca@devinci.fr Received 20 September 2001 Published 4 February 2002 Online at stacks.iop.org/Quant/2/45 1 Abstract The prices of index options at a given date are usually represented via the corresponding implied volatility surface, presenting skew/smile features and term structure which several models have attempted to reproduce. However, the implied volatility surface also changes dynamically over time in a way that is not taken into account by current modelling approaches, giving rise to ‘Vega’ risk in option portfolios. Using time series of option prices on the SP500 and FTSE indices, we study the deformation of this surface and show that it may be represented as a randomly fluctuating surface driven by a small number of orthogonal random factors. We identify and interpret the shape of each of these factors, study their dynamics and their correlation with the underlying index. Our approach is based on a Karhunen–Lo` ve e decomposition of the daily variations of implied volatilities obtained from market data. A simple factor model compatible with the empirical observations is proposed...
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