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1

If you are long TSLA and hedge it with a risk reversal, you have bought a put and sold a call on TSLA with the same expiration and effectively collaring your position. You are limiting your losses at the expense of limiting your gains over the holding period to the expiration of the options. Some traders will put on the risk reversal with a particular ...


2

Assuming you are purely interested in trading volatility, you would never run a delta position such as this. I could imagine you would want to sell risk reversals (going long puts, going short calls), when you think the expectation of a crash will become higher, in which case put side volatilities tend to go up, and make the position gain


0

Why would you need to model volatility to test an hypothesis. Just use the historical realised volatility and if you want to test the hypothesis how funds relate in the near future, then use the VIX index, it's a forward looking measure. Or you use some volatility tracking fund as a proxy, why use some model to estimate relationships when obviously some ...


2

The choice of hedging strategy cannot affect the expected p/l, because hedging just consists of doing at-market purchases or sales of the underlying, each of which have zero expected value at the time of transacting.


6

Put simply, VIX is a spot index (fair value to a variance swap on SPX of constant maturity) that you cannot own as a security. Market participants create futures for you to trade. Futures trade higher than the VIX -- if you long VIX futures, you lose when the futures contract converges to VIX. You therefore have a negative roll-down. VIX ETF doesn't avoid ...


0

A quick Google search, showed that your equation is not correct, as the error term should be taken at lag 1. If that is the case, forecasting has a direct meaning. Indicatively, check the following: Bollen, B., 2015. What should the value of lambda be in the exponentially weighted moving average volatility model?. Applied Economics, 47(8), pp.853-860 ...


4

To answer your second question, per "Pricing, Hedging and Trading Financial Instruments" by Carol Alexander, the following approaches have been proposed in literature: cubic polynomials (Dumas et al., 1998) piecewise quadratic functions (Beaglehole and Chebanier, 2002) cubic splines (Coleman et al., 1999) hyperbolic trigonometric functions (Brown and ...


0

The drift term of the short rate or forward rate dynamics has been adjusted so as to make the volatility term, that you see in the Vasicek formula for $P(0,T)$, disappear in a way, and be replaced by the current market price.


1

There are waaaaayyy better estimators than $Var(log(Close_{t+1}/Close_{t}))$. This close-close estimator is unbiased, and has a data efficiency defined as $1$. The Parkinson estimator uses high and low prices only (useful when you don't trust your open and close prices, or don't have them). It has a data efficiency of about $4$. The expected variance from "...


1

I am assuming you are asking this question as a programmer, not as a trader. From a traders perspective, due to put/call parity, we look at puts and calls at the same expiry and strike price as the same thing. Each option has an intrinsic value and a time value. After accounting for the cost of carry, the time value for the put and call are equal as is their ...


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