Frequently Asked Questions in Quantitative Finance
by Paul Wilmott · 3 Jan 2007 · 345pp · 86,394 words
academic and practitioner credentials are impeccable, having written over 100 research papers on mathematics and finance, and having been a partner in a highly profitable volatility arbitrage hedge fund. Dr Wilmott is a consultant, publisher, author and trainer, the proprietor of wilmott.com and the founder of the Certificate in Quantitative Finance
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-form solution for options with stochastic volatility with application to bond and currency options. Review of Financial Studies 6 327-343 Javaheri, A 2005 Inside Volatility Arbitrage. John Wiley & Sons Lewis, A 2000 Option valuation under Stochastic Volatility. Finance Press Lyons, TJ 1995 Uncertain Volatility and the risk-free synthesis of derivatives
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more accurate (if not necessarily stable through time). References and Further Reading Gatheral, J 2006 The Volatility Surface. John Wiley & Sons Javaheri, A 2005 Inside Volatility Arbitrage. John Wiley & Sons Taylor, SJ & Xu, X 1994 The magnitude of implied volatility smiles: theory and empirical evidence for exchange rates. The Review of Futures
Expected Returns: An Investor's Guide to Harvesting Market Rewards
by Antti Ilmanen · 4 Apr 2011 · 1,088pp · 228,743 words
were extremely impressive until 2007 but the losses in autumn 2008 were dramatic—and traumatic, prompting many investors to leave these strategies. The Merrill Lynch volatility arbitrage strategy, shown below, lost 12 years’ gradually earned excess returns in less than two months. (All index volatility-selling strategies plummeted in autumn 2008, but
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of various option-trading strategies, while at the same time long-run performance statistics became less appealing. The downfall was even worse for the “pure” volatility arbitrage strategy than for covered-option-writing strategies. Over 1989–2009, the latter still display higher returns and Sharpe ratios than a simple long-equities strategy
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is above (below) the 12-month moving average. Data are mainly from Bloomberg. Volatility. Volatility-selling returns are based on the simulated Merrill Lynch Equity Volatility Arbitrage Index since 1989, which tries to gain from the typically positive gap between market-implied volatility and subsequent realized volatility of the S&P 500
The Volatility Smile
by Emanuel Derman,Michael B.Miller · 6 Sep 2016
is the infinitesimal 1 The following sections are based on Riaz Ahmad and Paul Wilmott, “Which Free Lunch Would You Like Today Sir?: Delta Hedging, Volatility, Arbitrage and Optimal Portfolios” (2005). This chapter also owes a debt to Peter Carr, “Frequently Asked Questions in Option Pricing Theory” (1999). 2 For a review
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an inconsistent BSM framework with different underlying volatilities for each standard option. The local volatility surface calculated from market prices can also be useful for volatility arbitrage trading. You can calculate future local volatilities implied from option prices and then decide if they seem reasonable. If these future volatilities seem unreasonably low
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of a short position in a forward contract. References Ahmad, Riaz, and Paul Wilmott. 2005. “Which Free Lunch Would You Like Today Sir?: Delta Hedging, Volatility, Arbitrage and Optimal Portfolios.” Wilmott (November). Andersen, Leif, and Jesper Andreasen. 2000. “Jump-Diffusion Processes: Volatility Smile Fitting and Numerical Methods for Option Pricing.” Review of
Corporate Finance: Theory and Practice
by Pierre Vernimmen, Pascal Quiry, Maurizio Dallocchio, Yann le Fur and Antonio Salvi · 16 Oct 2017 · 1,544pp · 391,691 words
is on reasoning, which in many cases will become automatic (Chapters 15–19): efficient capital markets, the time value of money, the price of risk, volatility, arbitrage, return, portfolio theory, present value and future value, market risk, beta, etc. Then we review the major types of financial securities: equity, debt and options
Trading Risk: Enhanced Profitability Through Risk Control
by Kenneth L. Grant · 1 Sep 2004
those who either manage or fund convertible arbitrage portfolios to have a clear understanding of the risks associated with these worst-case scenarios. 3. Options Volatility Arbitrage. For those intrepid few wishing to capitalize on subtle and theoretically unsustainable discrepancies in the volatility pricing of options with the same or highly similar
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–149 implied volatility, 86–89, 150 leverage, 151–153 nonlinear pricing dynamics, 149 pricing, 88–89, 106 strike price/underlying price, relationship between, 149–150 volatility arbitrage, 106 Out-of-the-money option, 150 Over-the-counter derivatives, 148 Performance analysis, 7–8 Performance metrics, 16, 35 Performance objectives: “going to the
Trend Following: How Great Traders Make Millions in Up or Down Markets
by Michael W. Covel · 19 Mar 2007 · 467pp · 154,960 words
, Dunn made 28 percent in November of 2000 and 29 percent in December of 2000. Henry Convergent styles • World knowable • Stable world • Mean-reverting • Short volatility • Arbitrage-based Divergent styles • World uncertain • Unstable world • Mean-fleeing • Long volatility • Trend Following Mark S. Rzepczynski12 Don’t be fooled by the calm. That’s
Wealth and Poverty: A New Edition for the Twenty-First Century
by George Gilder · 30 Apr 1981 · 590pp · 153,208 words
“real terms.” You would have runaway sales of “hour insurance swaps,” and GDP might even go up for awhile, but real economic progress is not volatility arbitrage. Or, to change the metaphor, U.S. monetary policy resembles a housing policy pronouncement: “If we change the size of a foot from 12 to