Hedging Options with Different Time Units in the Pricing Models

This study examined the effects of the Greeks of the options and the trading results of delta hedging strategies, with three different time units or option-pricing models. These time units were calendar time, trading time and continuous time using discrete approximation (CTDA) time. The CTDA time model is a pricing model, that among others accounts for intraday and weekend, patterns in volatility. For the CTDA time model some additional theta measures, which were believed to be usable in trading, were developed. The study appears to verify that there were differences in the Greeks with different time units. It also revealed that these differences influence the delta hedging of options or portfolios. Although it is difficult to say anything about which is the most usable of the different time models, as this much depends on the traders view of the passing of time, different market conditions and different portfolios, the CTDA time model can be viewed as an attractive alternative.

Maximum Loss Calculation using Scenario Analysis, Heavy Tails and Implied Volatility Patterns

The objective of this paper is to improve option risk monitoring by examining the information content of implied volatility and by introducing the calculation of a single-sum expected risk exposure similar to the Value-at-Risk. The figure is calculated in two steps. First, there is a need to estimate the value of a portfolio of options for a number of different market scenarios, while the second step is to summarize the information content of the estimated scenarios into a single-sum risk measure. This involves the use of probability theory and return distributions, which confronts the user with the problems of non-normality in the return distribution of the underlying asset. Here the hyperbolic distribution is used to describe one alternative for dealing with heavy tails. Results indicate that the information content of implied volatility is useful when predicting future large returns in the underlying asset. Further, the hyperbolic distribution provides a good fit to historical returns enabling a more accurate definition of statistical intervals and extreme events.

Evaluating the Predictability of the Volatility Smile Using Return Distributions

In this paper, we examine the predictability of observed volatility smiles in three major European index options markets, utilising the historical return distributions of the respective underlying assets. The analysis involves an application of the Black (1976) pricing model adjusted in accordance with the Jarrow-Rudd methodology as proposed in 1982. Thereby we adjust the expected future returns for the third and fourth central moments as these represent deviations from normality in the distributions of observed returns. Thus, they are considered one possible explanation to the existence of the smile. The obtained results indicate that the inclusion of the higher moments in the pricing model to some extent reduces the volatility smile, compared with the unadjusted Black-76 model. However, as the smile is partly a function of supply, demand, and liquidity, and as such intricate to model, this modification does not appear sufficient to fully capture the characteristics of the smile.

Examining and Modeling the Dynamics of the Volatility Surface

The objective of this paper is to investigate and model the characteristics of the prevailing volatility smiles and surfaces on the DAX- and ESX-index options markets. Continuing on the trend of Implied Volatility Functions, the Standardized Log-Moneyness model is introduced and fitted to historical data. The model replaces the constant volatility parameter of the Black & Scholes pricing model with a matrix of volatilities with respect to moneyness and maturity and is tested out-of-sample. Considering the dynamics, the results show support for the hypotheses put forward in this study, implying that the smile increases in magnitude when maturity and ATM volatility decreases and that there is a negative/positive correlation between a change in the underlying asset/time to maturity and implied ATM volatility. Further, the Standardized Log-Moneyness model indicates an improvement to pricing accuracy compared to previous Implied Volatility Function models, however indicating that the parameters of the models are to be re-estimated continuously for the models to fully capture the changing dynamics of the volatility smiles.

Intraday and Weekend Volatility Patterns- Implications for Option Pricing

This study examines the intraday and weekend volatility on the German DAX. The intraday volatility is partitioned into smaller intervals and compared to a whole day’s volatility. The estimated intraday variance is U-shaped and the weekend variance is estimated to 19 % of a normal trading day. The patterns in the intraday and weekend volatility are used to develop an extension to the Black and Scholes formula to form a new time basis. Calendar or trading days are commonly used for measuring time in option pricing. The Continuous Time using Discrete Approximations model (CTDA) developed in this study uses a measure of time with smaller intervals, approaching continuous time. The model presented accounts for the lapse of time during trading only. Arbitrage pricing suggests that the option price equals the expected cost of hedging volatility during the option’s remaining life. In this model, time is allowed to lapse as volatility occurs on an intraday basis. The measure of time is modified in CTDA to correct for the non-constant volatility and to account for the patterns in volatility.

Volatility Smile Dynamics in Scenario Analysis

The objective of this paper is to suggest a method that accounts for the impact of the volatility smile dynamics when performing scenario analysis for a portfolio consisting of vanilla options. As the volatility smile is documented to change at least with the level of implied at-the-money volatility, a suitable model is here included in the calculation process of the simulated market scenarios. By constructing simple portfolios of index options and comparing the ex ante risk exposure measured using different pricing methods to realized market values, ex post, the improvements of the incorporation of the model are monitored. The analyzed examples in the study generate results that statistically support that the most accurate scenarios are those calculated using the model accounting for the dynamics of the smile. Thus, we show that the differences emanating from the volatility smile are apparent and should be accounted for and that the methodology presented herein is one suitable alternative for doing so.

Risk Minimizing Option Pricing for a Class of Exotic Options in a Markov-Modulated Market

We address risk minimizing option pricing in a regime switching market where the floating interest rate depends on a finite state Markov process. The growth rate and the volatility of the stock also depend on the Markov process. Using the minimal martingale measure, we show that the locally risk minimizing prices for certain exotic options satisfy a system of Black-Scholes partial differential equations with appropriate boundary conditions. We find the corresponding hedging strategies and the residual risk. We develop suitable numerical methods to compute option prices.

Small-scale fisheries resources management options - an overview: a key note address

Small-scale fisheries is traditional and rural based. Therefore, the paper is an over view of small-scale fisheries resources management in Nigeria. It provides about 80-90% employment to surrounding population. The small-scale fisheries are grouped in to two major sectors:- the artisanal or capture fisheries and aquaculture farming. The paper identified some management problems such as:- multi uses of the water bodies, lack of or inadequate data upon which sound management strategies are based, ownership of inland water bodies is a problem, uncontrolled exploitation hampers sustainable development, poor and low technology and lack of capital, land and credit facilities. The paper presented some management options for sustainable management. Measures to reduced fish spoilage have been advanced. Also highlighted is the role of fish culture in small-scale fisheries management

Valuation of wind energy projects: A real options approach

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A dynamic CGE modelling approach for analyzing trade-offs in climate change policy options: the case of Green Climate Fund

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Valuation of Wind Energy Projects: A Real Options Approach

We address the valuation of an operating wind farm and the finite-lived option to invest in it under different reward/support schemes: a constant feed-in tariff, a premium on top of the electricity market price (either a fixed premium or a variable subsidy such as a renewable obligation certificate or ROC), and a transitory subsidy, among others. Futures contracts on electricity with ever longer maturities enable market-based valuations to be undertaken. The model considers up to three sources of uncertainty: the electricity price, the level of wind generation, and the certificate (ROC) price where appropriate. When analytical solutions are lacking, we resort to a trinomial lattice combined with Monte Carlo simulation; we also use a two-dimensional binomial lattice when uncertainty in the ROC price is considered. Our data set refers to the UK. The numerical results show the impact of several factors involved in the decision to invest: the subsidy per MWh generated, the initial lump-sum subsidy, the maturity of the investment option, and electricity price volatility. Different combinations of variables can help bring forward investments in wind generation. One-off policies, e.g., a transitory initial subsidy, seem to have a stronger effect than a fixed premium per MWh produced.

A low-level geographic information system for coastal zone management with applications to Brunei Darussalam: Part III:: simulation and tracking oil spills

B:RUN is a low-level GIS software designed to help formulate options for the management of the coastal zone of Brunei Darussalam. This contribution presents the oil spill simulation module of B:RUN. This simple module, based largely on wind and sea surface current vector parameters, may be helpful in formulating relevant oil spill contingency plans. It can be easily adapted to other areas, as can the B:RUN software itself.

Assessing boost-assist options for turbocharged engines using 1-D engine simulation and model predictive control

Delivering acceptable low end torque and good transient response is a significant challenge for all turbocharged engines. As downsized gasoline engines and Diesel engines make up a larger and larger proportion of the light-duty engines entering the market, the issue takes on greater significance. Several schemes have been proposed to improve torque response in highly boosted engines, including the use of electrical assist turbochargers and compressed air assist. In this paper we examine these methods with respect to their effectiveness in improving transient response and their relative performance along with some of the practical considerations for real world application. Results shown in this paper are from 1-D simulations using the Ricardo WAVE software package. The simulation model is based on a production light-duty Diesel engine modified to allow the introduction of compressed air at various points in the air-path as well as direct torque application to the turbocharger shaft (such as might be available from an electrical assist turbocharger). Whilst the 1-D simulation software provides a suitable environment for investigating the various boost assistance options, the overall air path performance also depends upon the control system. The introduction of boost assistance complicates the control in two significant ways: the system may run into constraints (such as compressor surge) that are not encountered in normal operation and the assistance introduces an additional control input. Production engine controllers are usually based on gain-scheduled PID control and extensive calibration. For this study, the non-linear nature of the engine together with the multiple configurations considered and the slower than real-time execution of 1-D models makes such an approach time consuming. Moreover, an ad-hoc approach would leave some doubt as to the fairness of comparisons between the different boost-assist options. Model Predictive Control has been shown to offer a convenient approach to controlling the 1-D simulations in a close to optimal manner for a typical Diesel VGT-EGR air path configuration. We show that the same technique can be applied to all the considered assistance methods with only modest calibration effort required. Copyright © 2012 SAE International.

The production of radionuclides for nuclear medicine from a compact, low-energy accelerator system.

The field of nuclear medicine is reliant on radionuclides for medical imaging procedures and radioimmunotherapy (RIT). The recent shut-downs of key radionuclide producers have highlighted the fragility of the current radionuclide supply network, however. To ensure that nuclear medicine can continue to grow, adding new diagnostic and therapy options to healthcare, novel and reliable production methods are required. Siemens are developing a low-energy, high-current - up to 10MeV and 1mA respectively - accelerator. The capability of this low-cost, compact system for radionuclide production, for use in nuclear medicine procedures, has been considered.

Steel and aluminium in a low carbon future

Production of steel and aluminium creates 10% of global carbon emissions from energy and processes. Demand is likely to double by 2050, but climate scientists are recommending absolute reductions of at least 50% and these are Increasingly entering law. How can reductions of this order happen? Only 10-20% savings can be expected in liquid metal production, so the primary industry is pursuing carbon sequestration as the main solution. However, this Is as yet unproven at scale, and as well as carrying some risk, the capital and operating costs are likely to be high, but are as yet unknown. In parallel with these strategies we can also examine whether we can reduce demand for liquid metal. 'Material efficiency' may allow delivery of existing services with less requirement for metal, for instance through designing products that use less metal, reducing process scrap, diverting scrap for other use, re-using components or delaying end of life. Overall demand reduction could occur if goods were used more intensely, alternative means were used to deliver the same services, or total demand were constrained. The paper analyses all possible options, to define and evaluate scenarios that meet the 2050 target, and discuss the steps required to bring them about. The paper concludes with suggestions for key areas where future research In metal forming can support a future low carbon economy. © 2011 Wiley-VCH Verlag GmbH & Co. KGaA. Weinheim.