Lecture 27
Lecture 27
&
Risk Management
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Lecture 27
Put-Call Parity, Implied volatility, Swaptions
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.
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• In fact there exists a “No arbitrage
relationship”
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confirm to the parity condition.
• If call and put premium are mispriced and trading at
different price, this gives rise to arbitrage
opportunity.
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Implied volatility
• Option Premium(Call or Put)= f(F,X,T,r, )
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know as “Implied volatility”
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• In this example, let us assume that call premium
traded in the market as INR 11.
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implied volatility as 19.58%
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commodity.
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CVOL indexes.
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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
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commodities such Wheat, Corn, Soybean, Gold, Silver, Crude oil etc.
• Like CME, Bloomberg also calculates the implied volatility index for many
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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
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volatility index to gauge the underlying asset price movement in a near
term.
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Pay Fixed Swaption
Receive Fixed Swaption
Has the right enter into a commodity swap to pay fixed price (or receive floating
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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”