Scribd
Upload
17 views

Lecture 27

Uploaded by

dilipupadhyay1979
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
17 views

Lecture 27

Uploaded by

dilipupadhyay1979
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 9

Commodity Derivatives

&
Risk Management

EL
PT
Lecture 27
Put-Call Parity, Implied volatility, Swaptions

Dr. Prabina Rajib, VGSOM,


Dr. Prabina Rajib

N Professor
Vinod Gupta School of Management

&IIT Kharagpur
IIT Kharagpur, 721302
[email protected]
Commodity options & arbitrage
• Does arbitrage opportunity exist
for options on futures?
• Answer is YES.

EL
• In fact there exists a “No arbitrage
relationship”

Dr. Prabina Rajib, VGSOM, IIT Kharagpur


PT
 PUT-CALL PARITY
Applicable to EUROPEAN OPTIONS
• Put-call parity connects call
N
premium, put premium for given
underlying and a given maturity
with underlying futures price and
exercise price.
Does arbitrage applicable to options on
futures?
• PUT-CALL PARITY : C+X= P+F
• Assuming that these prices also prevail in market
 52(c) +6500 (X) -463 (p)-6086(F) = 3
• Difference is too small for arbitrage opportunity.
• Option calculators give theoretical price which

EL
confirm to the parity condition.
• If call and put premium are mispriced and trading at
different price, this gives rise to arbitrage
opportunity.

Dr. Prabina Rajib, VGSOM, IIT Kharagpur


PT
• For example, let us assume, put premium is trading
at INR 430 and call at INR 52.
 C+X (6552) > P+F (6086+430 = 6516)

N
Implied volatility
• Option Premium(Call or Put)= f(F,X,T,r, )

•  = Historical volatility. One needs to find out  to


calculate the option premium.

• When one uses the option premium traded in a


market and back calculate the volatility, the same is

EL
know as “Implied volatility”

• Implied volatility: Volatility implied by the known

Dr. Prabina Rajib, VGSOM, IIT Kharagpur


option price

PT
• In this example, let us assume that call premium
traded in the market as INR 11.

•
implied volatility as 19.58%

What this means?


N
Buy inputting the same to the model, one gets the

• The trader is expecting the underlying asset


volatility to be 19.58% within the next 60 days
IMPLIED VOLATILITY INDEX
https://www.cmegroup.com/education/articles-and-reports/introduction-to-the-cme-group-volatility-index-cvol.html
https://www.cmegroup.com/education/courses/introduction-to-cvol/understanding-the-cvol-index.html
https://www.cmegroup.com/market-data/cme-group-benchmark-administration/files/cvol-methodology.pdf

• Implied volatility index is a index of these


calculated volatility values.

• The index consists the implied volatility


for different strike price for different
maturity traded on a given date for a given

EL
commodity.

• CME is calculating and reporting implied

Dr. Prabina Rajib, VGSOM, IIT Kharagpur


volatility index for many commodities. –

PT
CVOL indexes.

• “Using our proprietary simple variance


methodology that assigns equal weighting
to strikes across the entire implied
volatility curve, the CVOL index produces
a more representative measure of the
market’s expectation of 30-day forward
risk” – CME
N hypothetical example for options
having 60 day maturity

• Higher the index, higher is the expected


uncertainty
Implied Volatility Index

• Implied volatility index is also known as “fear gauge”.


• “Implied volatility is a measure of expected future “bounciness” of the underlying, as

EL
opposed to realized volatility, which is a measure of what has already happened” –
CME GROUP
CME calculates and reports commodity implied volatility Index (CVOLtm) for many

Dr. Prabina Rajib, VGSOM, IIT Kharagpur


•

PT
commodities such Wheat, Corn, Soybean, Gold, Silver, Crude oil etc.

• Like CME, Bloomberg also calculates the implied volatility index for many

N
commodities deepening on the traded options prices
Bloomberg Implied Volatility Index
Crude Oil options , HRW Wheat Call option, Gold Option traded at CME
Data Source: Bloomberg

EL

Dr. Prabina Rajib, VGSOM, IIT Kharagpur


PT
N
Implied Volatilities Index

• Higher the implied volatility, higher is the risk associated with


underlying asset price.
Many large export and import houses, commodity traders use implied

EL
•
volatility index to gauge the underlying asset price movement in a near
term.

Dr. Prabina Rajib, VGSOM, IIT Kharagpur


PT
• In fact, many traders have started using the implied volatility to
determine the future price level and consequently find out whether an
option will be in the money or out of money.
N
Swaption on Commodities
• In additions to futures, swaps, options, commodity consumers/producers also enter into
SWAPTIONS to mitigate the commodity price risk.
• Swaptions are OTC contracts.
Swaptions are basically Options on Swaps. (2 types)

EL
•
 Pay Fixed Swaption
 Receive Fixed Swaption

Dr. Prabina Rajib, VGSOM, IIT Kharagpur


PT
• A trader enters into options position, pays option premium upfront

 Has the right enter into a commodity swap to pay fixed price (or receive floating

N
price) on specified future date or dates. This is an example of “Pay Fixed Swaption”

 Has the right enter into commodity swap to receive fixed price ( or pay floating
price) on specified future date or dates. This is an example of “Receive Fixed
Swaption”

You might also like