University Finance: Option Future & Risk Valuation Assignment

This project undertakes an analysis of option future and risk valuation, focusing on the relationship between historical and implied volatility. The assignment involves plotting historical and implied volatility on a graph, analyzing their relationship, and developing a delta-neutral strategy for a specific period. The analysis includes the use of descriptive statistics to understand the volatility characteristics and market perceptions of price shifts of a specific product. The core of the project requires the development of a delta-neutral strategy to speculate or arbitrage on volatility, including a detailed explanation of the strategy's mechanics and transaction details. The project uses provided data to make the analysis and strategy, and also considers the cost of capital in the strategy.

Option Future
&
Risk Valuation
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Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
1. Plotting annual historical volatility with 1-year implied volatility in a graph:........................3
2. Analyse the relationship between historical volatility and implied volatility:........................3
3. Delta neutral strategy for the period 10/03/2020 to 25/03/2020 to speculate/arbitrage on
volatility:......................................................................................................................................7
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INTRODUCTION
TASK
1. Plotting annual historical volatility with 1-year implied volatility in a graph:
2. Analyse the relationship between historical volatility and implied volatility:
Historical Volatility: - This refers to a statistical indicator of dispersion over a certain period of
time-span of returns for specific security or price index. Average deviation through the average
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prices of any Financial Instrument in that time frame is determined by assessing this variable
generally.
Implied volatility relates to metric which represents a market perception of the probability of
shifts in price of a specific product. Investors may use it it for forecasting potential trends and
supplies and demands and also use it for contracts on price options.
Implied volatility and historic volatility are critical factor for analysing trading options.
Traders must consider the main factors of implied volatility in order to better recognize implied
volatility options. Implied volatility factors represent the external value of stock option
and length of time remaining to expire.
Descriptive statistics:
CSL - HISTORICAL VOLATILITY 1 YEAR
Mean 0.211514313
Standard Error 0.001206372
Median 0.21785
Mode 0.234
Standard Deviation 0.02761511
Sample Variance 0.000762594
Kurtosis 0.445293757
Skewness 0.086924251
Range 0.1493
Minimum 0.1634
Maximum 0.3127
Sum 110.8335
Count 524
Confidence Level(95.0%) 0.002369929
CSL CONTINUOUS CALL - IMPLIED VOL(ATM)
Mean 0.215660305
Standard Error 0.003087183
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Median 0.19695
Mode 0.1719
Standard Deviation 0.070668852
Sample Variance 0.004994087
Kurtosis 27.3919374
Skewness 4.632848994
Range 0.6122
Minimum 0.1541
Maximum 0.7663
Sum 113.006
Count 524
Confidence Level(95.0%) 0.006064803
CSL CONTINUOUS PUT - IMPLIED VOL(ATM)
Mean 0.215114
Standard Error 0.003054
Median 0.19665
Mode 0.179
Standard Deviation 0.069901
Sample Variance 0.004886
Kurtosis 27.41154
Skewness 4.620598
Range 0.5576
Minimum 0.1506
Maximum 0.7082
Sum 112.7196
Count 524
Confidence Level(95.0%) 0.005999
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3. Delta neutral strategy for the period 10/03/2020 to 25/03/2020 to speculate/arbitrage on
volatility:
Trading in options is generally generally regarded as speculative. Where most positions
are developed around the merely the trader's 'vision.' If trader's market forecast were inaccurate,
though, the strategy would lead to massive losses. A Delta-neutral strategy is a tactic that helps
to make a profit without predicting market trend.
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