| The
Dynamic Relationship between Price Volatility, Trading Volume and Market Depth:
Empirical Evidence from the Malaysian Futures Market
--
Wan
Mansor Mahmood and Siti Hajar Aisyah Salleh
This
study examines the relations between returns, trade volume and market depth for
two futures contracts, namely, Stock Index (SI) futures and Crude Palm Oil (CPO)
futures traded at the Kuala Lumpur Option and Financial Futures (KLOFFE), and
Commodity and Monetary Exchange (COMMEX), respectively. The effect of volume as
well as open interest, proxy of market depth, on volatility and vice versa are
also studied. Since both volume and open interest are highly serially correlated,
these variables are divided into expected and unexpected components. The results
show a positive expected and unexpected volume and market depth on volatility,
similar to earlier studies on futures market. ©
2006 IUP . All Rights Reserved.
An
Analysis of the Cross-sectional Impact of Option Trading Volume, Strike Price
and Premium of Options on the Volatility of Underlying Stock Prices
-- Debasis
Bagchi
Trading
in derivatives has recently been introduced in India. Market regulators find that
volatility in the Indian market is much higher than in the developed market. Higher
volatility induces investors to buy call options since they are willing to pay
higher premiums. This paper is an attempt to determine the causes of volatility
for which the implied volatility (calculated using Black-Scholes model) of call
options of a sample of the largest traded option stocks in India is examined.
The volume of options traded, strike price, option premium and stock price in
various combinations are used as variables in this analysis. The investigation
yields mixed results, i.e., in certain cases, the mean volatility of in-the-money
call options is higher than that of out-of-the-money call options whereas, in
other cases, opposite results are observed. Regression analysis finds that the
volume of traded option has a significant negative relationship on the implied
volatility. The ratio of strike price plus premium to stock price is also found
to be negatively related to implied volatility. It is also found that, in some
cases, a positive relationship exists between these two variables on implied volatility.
The results are similar to the findings of Rubenstein. The reasons for the contradictory
results are not clear but could perhaps be due to the fluidity of the general
political and economic condition prevailing in India during the period under study.
This may have been the causative factor of asymmetric behavior on the part of
the investors. However, it is found that the premium - volume differential of
the call options is positively related to the volatility of all the sample stocks. ©
2006 IUP . All Rights Reserved.
Improving
Accuracy of Option Price Estimation using Artificial Neural Networks
-- Subrata
Kumar Mitra
The
Black-Scholes (B-S) formula, a well-known model for pricing derivative securities,
exhibits certain systematic biases from observed option prices in the market.
In this study, an attempt is made to reduce the biases and improve the accuracy
of option price estimation using Artificial Neural Networks (ANN). It is based
on all Nifty call option prices quoted on National Stock Exchange for the period
May 28, 2004 to June 30, 2005. It is found that the error between the quoted option
prices and estimated option prices using the Black-Scholes formula reduces to
a large extent, when the original formula is modified using an Artificial Neural
Network model. The usefulness of ANN is also validated with out-of-sample data. ©
2006 IUP . All Rights Reserved.
Hedging
Tranched Index Products: Illustration of Model Dependency
-- D
Guegan and J Houdain
Synthetic
Collateralized Debt Obligations (CDOs) have been the principal growth engine for
the credit derivatives market over the last few years. The appearance of credit
indices has helped the development of a more transparent and efficient market
in correlation. This increase in volumes makes it necessary to use models of increasing
diversity and complexity in order to model credit variables. Tranched index products
are exposed to spread movements, defaults, correlation and recovery uncertainties.
Hedging these risks requires an understanding of the sensitivities of different
tranches in the capital structure to these sources of risk. The dynamic hedging
of index tranches presents dealers with two main challenges. First, the dealer
must calculate the hedge positions (delta or hedge ratio) of the index or individual
CDS or other index tranches. These deltas or hedge ratios are model-dependent,
which leaves dealers with model risk. Second, the value of an index tranche depends
on the correlation assumption used to price and hedge it. Since default correlation
is unobservable, a dealer is exposed to the risk that his correlation assumption
is wrong (correlation risk). In this paper, index tranches' properties and several
hedging strategies are discussed, and model risk and correlation risk are analyzed
through the study of the efficiency of several factor-based copula models (like
the Gaussian, the double-t and the double-NIG using implied correlation and a
particular NIG one-factor model using historical correlation) versus historical
data in terms of hedging capabilities. Each model's underlying theoretical approach
is commented upon and the computational complexity of each of the models is then
described and analyzed. It is observed that there is a significant model and correlation
risk in the credit derivatives market due to the discrepancies between the models
in terms of hedging results and also due to the frequent changes in the tranches'
behavior. ©
2006 IUP . All Rights Reserved.
Financial
Derivatives: Concepts and Trends
-- Shaveta
Gupta and Anu Sahi
A
firm faces several types of risks. Its profitability fluctuates due to unanticipated
changes in demand, cost, price, taxes, interest rates, exchange rates, etc. Managers
may not be able to fully control these risks, but to some extent, can decide the
risk that a firm can bear. They adopt many strategies to reduce the risk by keeping
several options open, which ultimately creates flexibility that might bail them
out in difficulties. One major way of reducing the exposure to risk is by entering
into financial derivatives. Risk management is an integral part of the financial
service industry; and due to globalization the Indian financial market will see
an increase in the products in this category. ©
2006 IUP . All Rights Reserved. | 
