abhishreshthaa
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WHAT IS VOLATILITY
Higher the predicted volatility higher the premium
Greater the possibility of price movements greater the risk for the seller , so he is forced to charge higher premiums
In a liquid market volatility is a market consensus and is measured by Implied Volatility.
THE CONCEPT OF VOLATILITY
Historical Volatility
Measures the rate of change in the value of a variable over a period of time.
Take observations S0, S1, . . . , Sn at intervals of t years, define the continuously compounded return as:
Calculate the standard deviation, s , of the ui ´s
The historical volatility estimate is:
Implied Volatility:
Refers to the volatility implied by the markets. It is arrived at by calculating the rate of change of option prices. Implied volatility can be calculated only for options.
Empirical study indicates that volatilities exhibit inverse relationship to underlying variable.
A research done by the group on the index and volatility for the past 8 years indicated that, volatility moved in a band of 19% to 41% for the Sensex and 20% to 40% for the Nifty
Breach of volatility bands have resulted in trend reversals. Hence volatility should be monitored to gauge market trends.
Higher the predicted volatility higher the premium
Greater the possibility of price movements greater the risk for the seller , so he is forced to charge higher premiums
In a liquid market volatility is a market consensus and is measured by Implied Volatility.
THE CONCEPT OF VOLATILITY
Historical Volatility
Measures the rate of change in the value of a variable over a period of time.
Take observations S0, S1, . . . , Sn at intervals of t years, define the continuously compounded return as:
Calculate the standard deviation, s , of the ui ´s
The historical volatility estimate is:
Implied Volatility:
Refers to the volatility implied by the markets. It is arrived at by calculating the rate of change of option prices. Implied volatility can be calculated only for options.
Empirical study indicates that volatilities exhibit inverse relationship to underlying variable.
A research done by the group on the index and volatility for the past 8 years indicated that, volatility moved in a band of 19% to 41% for the Sensex and 20% to 40% for the Nifty
Breach of volatility bands have resulted in trend reversals. Hence volatility should be monitored to gauge market trends.