Application and Evaluation of Valuation Methods of Volatility Derivatives

Abstract

With the integration of the world and the development of financial markets, investors have more investment options and are accordingly exposed to greater and more complex risks. To better adapt to such changes as well as cope with risks, financial derivatives have been created. Volatility derivatives are a more sophisticated class of financial derivatives whose value is based on the volatility of a certain asset. Through literature analysis, comparative analysis and case studies, this paper focuses on the definition of volatility derivatives, the role they play for investors, and examines whether volatility derivatives are correctly priced by studying their pricing methods. The paper finds that volatility derivatives provide investors with efficient tools to speculate and hedge. In terms of pricing, despite the availability of metric values such as B-S models and stochastic volatility models, their pricing is subject to various limitations that need to be further explored.