|
The
Behavior of Implied Volatility Surface: Evidence from Crude
Oil Futures Options -- Amine
Bouden
This
paper investigates Implied Volatility Surface (IVS) patterns
for call options on crude oil futures. Instead of studying
the power of the large number of explanatory factors inherent
to oil markets, it focuses on the common characteristics of
option prices. By using quadratic Implied Volatility Functions
(IVFs), it aims to establish a mapping from implied volatilities
to option's intrinsic characteristics, i.e., moneyness and
time to expiration, and to test the capacity of these functions
to provide a good forecast of option prices. The paper reveals
that the profile of crude oil implied volatility is too complex
to be fully explained by IVFs. The main contribution of the
paper is to perform an econometric explanatory analysis on
a highly volatile marketthe petroleum market.
©
2008 The Icfai University Press. All Rights Reserved.
Risky
Swaps -- Ilya Gikhman
A
reduced form of risky bond pricing was presented in Gikhman's
earlier work. At default date, a bond seller fails to continue
to fulfill his obligation and the price of the bond drops
sharply. For no-default scenarios, if the face value of the
defaulted bond is $1 then the bond price just after the default
is its Recovery Rate (RR). Rating agencies and theoretical
models try to predict RR for companies or sovereign countries.
The main theoretical problem with a risky bond or with the
general debt problems is presenting the price, knowing the
RR. The problem of a Credit Default Swap (CDS) pricing is
somewhat an adjacent problem. Recall that the corporate bond
price inversely depends on interest rate. In case of a default,
the credit risk on a debt investment is related to the loss.
There is a possibility for a risky bond buyer to reduce his
credit risk. This can be achieved through buying a protection
from the protection seller. The bondholder would pay a fixed
premium up to maturity or default, whichever comes first.
If default comes before maturity, the protection buyer will
receive the difference between the initial face value of the
bond and RR. This difference is called the `loss given default'.
This contract represents the CDS. The counterparty that pays
a fixed premium is called the CDS buyer or protection buyer;
the opposite party is the CDS seller. Note, that in contrast
to corporate bond, CDS contract does not assume that the buyer
of the CDS is the holder of the underlying bond. Also note
that the underlying to the swap can be any asset. It is called
a reference asset or a reference entity. Thus, CDS is a credit
instrument that separates credit risk from the corresponding
underlying entity. The formal type of the CDS can be described
as follows: The buyer of the credit swap pays fixed rate or
coupon until maturity, or default in case it occurs before
the maturity. If default does occur, the protection buyer
delivers cash or a default asset in exchange with the face
value of the defaulted debt. These are known as cash or physical
settlements.
©
2008 The Icfai University Press. All Rights Reserved.
Valuing
a Listed Property Fund or Trust on the Johannesburg Securities
Exchange (JSE) Using a Real Options Technique
-- Tumellano Sebehela
The
empirical study was undertaken to critically analyze if there
was any other value other than the calculated market value
during the time of the merger of the two property funds listed
on the Johannesburg Securities Exchange. In doing so, the
real options technique is used, because according to option
valuation theory, real options have the flexibility that traditional
valuation techniques do not have. The optionality that existed
in this case was due to one listed property fund merging with
another listed property fund. The listed property fund that
acquires the other fund will be exercising its call option
on the acquired fund. Most of the written research papers
on optionalities within real estate market are on the option
to develop a vacant land or build a new building. It seems
that there is not much literature on listed real estate funds
and optionality at the moment. From South Africa's perspective,
there are relatively no research papers on real estate and
real options. Normally, when an investor applies a hedging
strategy, he/she buys the cheapest asset, selling the expensive
one. In this case, it is recommended that the investor should
exercise a long call option and short the underlying, as the
price of the call option is relatively cheap than that of
a Freestone Property Fund.
©
2008 The Icfai University Press. All Rights Reserved.
The
Predictability Power of Trading Volume Volatility in Stock
Index Futures Markets -- Noor
Azlinna Azizan
This
paper examines whether trading volume of the stock index futures
can be used as a tool to predict the movement of their respective
prices in Malaysia, Singapore and London. If the market is
efficient, current prices of the stock index futures will
impound all the information available in the market and all
the predicting activity is pointless. This paper uses selected
tests to determine the efficiency of each market, in the view
of trading volume. The tests are, Granger causality test in
linear and non-linear way, BDS test to see the distribution
of trading volume, whether non-linear behavior exists in this
time series, and finally threshold autoregressive model is
used as a non-linear model and tests against BDS statistic.
The results suggest that London market exhibits bidirectional
relationship between volume and volatility, but not Singapore
and Malaysia. The speed of adjustment when the volume crosses
the non-arbitrage border is faster in London than in the other
two markets.
©
2008 The Icfai University Press. All Rights Reserved.
Relevance
of Real Options to Corporate Investment Decisions
-- Giampiero Favato
`Real
Options' is the term used to refer to the application of option
pricing theory to the valuation of investments in non-financial
or `real' assets, where much of the value is attributable
to flexibility and learning over time A key problem with real
options is that there are many different approaches. In this
paper, the different taxonomies that have been identified
are reviewed, together with their implications for management
use.
©
2008 The Icfai University Press. All Rights Reserved.
|
