# Tag Info

5

I have heard the following argument- barring transaction fees, if my estimation of future realized vol is 30% and 1-month ATM implied vol is 20%, then I could potentially buy a 1-month ATM call/put and delta hedge it; as time passes and my vol estimate comes true I will make a profit. You are not guaranteed to make a profit even in this case since delta ...

2

The Heston model can have that property. If you make the correlation negative between the Brownian motions in the $dS_{t}$ process and the $d\nu_{t}$ process you imply that price is negatively correlated with variance.

2

Because of differing underlying factor risks. These might include such things as policy risk (eg. tax, capital controls), central bank intervention risk (eg. a currency peg at one extreme), economic factors (eg. sensitivity to outlook for GDP growth and inflation), and financial market risk dependencies (eg. interest rate differentials, equity market risk).

2

Nevermind, i'm just confusing myself. Now I understand what I misunderstood. The implied volatility surface of a prices of calls generated by a stochastic volatility model will not be constant since the implied volatility is found using the Black-Scholes model. The Black-Scholes model and a stochastic volatility model of course disagree on prices, and hence ...

1

Portfolio beta is a function of market vol, portfolio vol and correlation between market and portfolio; so correlation is indeed the only free variable. (But if you have complete control over the portfolio-construction process, you might as well target beta and then scale the weights so that you meet your volatility target.) To control correlation, you'll ...

1

Apologies for the delay on the hedging of non-forward-starting volatility swaps, but it's only since this week that I have an answer for this. So, for plain volswaps, I can give you a nonparametric hedge in terms of varswaps only. That's not as cheap as using a single option (which I believe is not possibe anyway), but certainly better than trading an ...

1

Yeah this is often called Spot-Vol correlation and is well known. Most people take this into account. I think if you just google spot-vol correlation you will come up with many example/models.

1

I assume you work in the Black Scholes framework. Then, \begin{align*} P(S_0,K,T) = Ke^{-rT}\Phi(-d_2)-S_0\Phi(-d_1), \end{align*} where \begin{align*} d_1 &= \frac{\ln\left(\frac{S_0}{K}\right)+\left(r+\frac{1}{2}\sigma^2\right)T}{\sigma\sqrt{T}}, \\ d_2 &= \frac{\ln\left(\frac{S_0}{K}\right)+\left(r-\frac{1}{2}\sigma^2\right)T}{\sigma\sqrt{T}}= ...

Only top voted, non community-wiki answers of a minimum length are eligible