Tag: volatility-weighted

The Volatility Premium and Black-Scholes Pricing

The Volatility Premium and Black-Scholes Pricing

The implied volatility is generally equal to or significantly greater than the forecasted volatility; for instance, the BSM implied volatility is, in general, an upward biased estimator. Indeed, by selling implied volatility a risk premium is provided because of the many expected and unexpected events that may occur. Moreover, market microstructure posits that implied volatility should be biased high because market makers profit from the bid-ask spread in the options by slightly raising their quotes (i.e., going slight long volatility exposure particularly on the downside). However, this absolutely doesn’t mean that it is always possible to profit by selling implied volatility

Capital Allocation Methods

Capital Allocation Methods

Capital allocation methods are used to estimate risk margins in the form of return on equity (ROE) measurements and targets from a top-down perspective. Actuarial risk theory views risk from a bottom-up perspective because it aims at modeling solvency. At a macro level, financial theory views capital as the equity capital supplied by investors.

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