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

How is present value affected by a change in discount rate, How is present ...

How is present value influenced by a change in the discount rate? Present value is oppositely related to the discount rate.  Alternatively, present value moves in the reverse dire

Illustrate example of company objectives, Example of Company Objectives ...

Example of Company Objectives Divide from the problem of which goal a company ought to pursue are the questions of which goals companies claim to pursue and which goals they a

The profitability and liquidity of the firm, Explain how the working capita...

Explain how the working capital management policies affect the profitability and liquidity of the firm?

Financial statement analysis report, Financial statement analysis report: ...

Financial statement analysis report: 1. Perform a comparative analysis (horizontal analysis). Analyze two items on the balance sheet and two items on the income statement for

Why auditors need to attain audit evidence, Why auditors need to attain aud...

Why auditors need to attain audit evidence When significant fluctuations/unexpected relationshipsare identified which are inconsistent with  other  relevant  information  or  t

Important areas of personal financial management, Gary and Joyce Yau, both ...

Gary and Joyce Yau, both 30, last month bought their dream house in London, Ontario. The purchase price was $450,000 plus addition fees such as taxes, legal fees, administration fe

Define the gropus of profit maximisation criterion, Define the gropus of Pr...

Define the gropus of Profit maximisation criterion Profit maximisation criterion has, though, been questioned and criticized on several grounds. Reasons for the opposition in

Financial maket, knowledge of financial market is power discuss

knowledge of financial market is power discuss

Calculate the rate of return, A Life Insurance Company invested $10,000,000...

A Life Insurance Company invested $10,000,000 in pure-discount U.S. bonds in May 1995 while the exchange rate was 80 yen per dollar. The insurance company liquidated the investment

Define how do mergers affect small businesses, How do mergers affect small ...

How do mergers affect small businesses? A: As per to a recent study by Federal Reserve and Wharton Financial Institutions Center economists, not a big deal. Their analysis reve

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