Long and short dated volatility, Financial Management

Assignment Help:

Q. Long and short dated volatility?

1. If an investor purchase long-dated volatility as well as sells short-dated volatility then the investor is expecting a decrease in the short dated volatility and an increase in the long dated volatility.

Obviously there is no guarantee that these expectations will be realized. If short run volatility goes up or else and long run volatility decreases the pay off from the position would definitely be negative.

This is equal to an investor constructing a short straddle position by using knock-out options. Long straddle may be constructed by utilizing options which have break-out clause to put a limit to unrestricted risk of loss that arises from the short (straddle) position in the short run.

If short dated volatility turns out to be high an additional premium is able to be triggered on the options which are used for the long straddle.

This added payoff from the long volatility position off sets the losses from the short volatility position.

3. The applicable payoff function will shift upwards by the amount of the additional payoff.

4. If the added premium is a fixed amount this may cut potential losses yet it mayn't be sufficient enough. Nevertheless considering that the short position is taken for one month this risk mayn't be a very big risk.

5. It is understandable from the text that volatility positions taken by using the straddles are not pure volatility positions.


Related Discussions:- Long and short dated volatility

Types of treasury bills, Types of Treasury Bills Treasury bills are iss...

Types of Treasury Bills Treasury bills are issued at various maturities, generally up to one year. Thus, they are useful in managing short-term liquidity. At present, the GOI (

Floor Brokers, Floor Brokers These people have the responsibility of ex...

Floor Brokers These people have the responsibility of executing the trades forwarded by the FCMs on the floor of the exchange. They can also trade for their own account. They w

What do you mean by sarbanes-oxley, Q. What do you mean by Sarbanes-Oxley? ...

Q. What do you mean by Sarbanes-Oxley? Sarbanes-Oxley (SOX) - Sarbanes-Oxley Act was signed into law on 30 July 2002 by President Bush. Act is designed to oversee the financial

Operational cycle, using the operating cycle and any other financial manage...

using the operating cycle and any other financial management knoweledge,dicuss the applicability of such a cycle to the poultry biussiness in uganda (consider broilers)

Yield, Yield Yield represents the actual return on the investments. Dif...

Yield Yield represents the actual return on the investments. Different types of yield are discussed below: Coupon Yield: The fixed interest rate on a government security or

Explain concept of returns, Meaning of Returns The return from holding a...

Meaning of Returns The return from holding an investment over some period - say, a year, is simply any cash payments received due to ownership, plus the change in market price,

Exchange Rate Parity Conditions, 1) According to the IFE (RIP), if U.S. inv...

1) According to the IFE (RIP), if U.S. investors expect a 3% rate of domestic inflation over one year, and a 6% rate of inflation in European countries that use the EUR, and requir

Mass and batch production, a) IPod -Line / Mass production is most suitable...

a) IPod -Line / Mass production is most suitable given that Apple can sell the standardised product to mass markets across the world. Only small variations to the production proces

Explain the dividends and interest payments, Dividends and interest payment...

Dividends and interest payments Payment  of  dividends  and  interest  can  either  be  demonstrated under financing activities or  under operating activities. Sum of the 3

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd