Dowling, Sean, & Jayaram Muthuswamy (2005) "The
Implied Volatility of Australian Index Options", Review of Futures Markets 14 (1).
Finally, in the section "Hedging Under Volatility Risks," we compute a risk minimization hedging when at-the-money
implied volatility follows an Ornstein-Uhlenbeck process and compare its hedging effectiveness with that of using the underlying under both instantaneous and
implied volatility risk.
This volatility index is produced using eight S&P 100 index puts and calls, and allows for market microstructure frictions such as bid-ask spreads, the American features of the option contracts, and discrete cash dividends, measuring the
implied volatility on a synthetic at-the-money one month maturity option contract.
Given that there exists a clear-cut relationship between the
implied volatility and the option's price, on some option markets the quotes are given directly in terms of implied volatilities rather than in terms of prices expressed in currency units.
Under the (BSM) Black-Scholes-Merton model (outlined in Black and Scholes 1973 and Merton 1973) with an annualized
implied volatility of 20 percent and a risk-free rate of 5 percent, the price of the call option is $3.
Although there is no theoretical foundation to explain
implied volatility smiles, this could be supported if the assumptions for the pricing model (from where implied volatilities were obtained) were verified, in this case, by the Black 76 model.
One-week
implied volatility reflects market uncertainty about the exchange rate one week forward.
By purchasing the option with the lowest
implied volatility, or selling the option with the highest
implied volatility, we are making the most of our investment opportunities.
Chiras and Manaster (1978) compare the predictability of historical volatility and weighted
implied volatility for future stock returns variance.
7 ppt - was in Norilsk Nickel GDRs, while the largest decline in
implied volatility was in Rosneft GDRs, for which the implied fell 2.
1,
implied volatility was near the median level of 16.
A decline in actual volatility of the exchange rate in parallel with a decline in
implied volatility.
