Options Exchange Research Articles

Financial Innovation of Mass Destruction—The Story of a Countrywide FX Options Debacle

Astonishingly little attention has been paid in academic literature to the 2008–2009 foreign exchange (FX) options debacle in Poland, the scale of which was unheard of. It affected not only an individual organization but a significant part of economy, being an example of a situation in which operational risk at the company level could have impacted systemic risk. The research provides evidence of the dark side of financial innovations through an analysis of a countrywide case on an emerging market, utilizing a primary qualitative content analysis (QCA) of over 750 documents (including press releases, public authorities’ accounts, and corporate statements). It documents that the FX options debacle was caused by financial institutions which shrouded some aspects of innovative securities or took advantage of information asymmetry to exploit uninformed clients. The study concludes that both adequate legal regulations and proper operational risk management are crucial to avoid similar corporate failures.

Pricing of vulnerable exchange options with early counterparty credit risk

The exchange option is one of the most popular options in the over-the-counter (OTC) market, which enables the holder of two underlying assets to exchange one with another. In OTC markets, with the increasing apprehension of credit default risk in the case of option pricing since the global financial crisis, it has become necessary to consider the counterparty credit risk while evaluating the option price. In this study, we combine the vulnerable exchange option and early counterparty default risk to obtain the closed-form formula for the vulnerable exchange option with early counterparty credit risk by using the method of dimension reduction, Mellin transform, and the method of images. Moreover, we examine the pricing accuracy of the option value by comparing our closed-form solution with the formula derived by the Monte-Carlo simulation.

Меценатство и благотворительность как особенности художественного рынка России

The relevance of the study is due to the need to revive the traditions of collective activity in modern Russia. The socio-economic situation of the 21st century has generated special conditions for the development of artistic practices: mass digitalization, the tendency to invest in art, the importance of preserving copyright (blockchain in art), the idea of creating a brand with the artist`s name etc. — all these implies the global crisis of traditional art market. The process of adapting artists to new conditions is ambiguous since the historical context of the development of the art market dictated various options for commodity exchange and gathering, each era had its own specific features of the presentation of the commercial nature of works of fine art. The works of art were originally intended exclusively for personal consumption. The transfer of fine arts to other hands used to be free of charge: as a sign of respect, honor or as a ritual action. Gradually, these narrow frameworks were breached, and works of fine art increasingly fulfilled a public function, serving a religious cult, power. Among the entrepreneurs were real connoisseurs of art making excellent collections that became part of the domestic cultural heritage and national heritage. The authors conclude that in each historical era the art market had its own features, and the work of fine art became a commodity in a classical sense with the advent of an intermediary on the market; the main specific feature of the domestic art market is its formation on the basis of collecting closely related to philanthropy and charity.

Foreign Exchange Options on Heston-CIR Model Under Levy Process Framework

Foreign Exchange Options on Heston-CIR Model Under Levy Process Framework

A Compound Exchange Options Model to Valuate a Smart City Investment in Photovoltaic Plants

A Compound Exchange Options Model to Valuate a Smart City Investment in Photovoltaic Plants

Least squares Monte Carlo methods in stochastic Volterra rough volatility models

In stochastic Volterra rough volatility models, the volatility follows a truncated Brownian semistationary process with stochastic volatility of volatility (vol-of-vol). Recently, efficient Chicago Board Options Exchange Volatility Index (VIX) pricing Monte Carlo methods have been proposed for cases where the vol-of-vol is Markovian and independent of the volatility. Using recent empirical data, we discuss the VIX option pricing problem for a generalized framework of these models, where the vol-of-vol may depend on the volatility and/or may not be Markovian. In such a setting, the aforementioned Monte Carlo methods are not valid. Moreover, the classical least squares Monte Carlo faces exponentially increasing complexity with the number of grid time steps, while the nested Monte Carlo method requires a prohibitive number of simulations. By exploring the infinite-dimensional Markovian representation of these models, we devise a scalable least squares Monte Carlo for VIX option pricing. We apply our method first under the independence assumption for benchmarks and then to the generalized framework. We also discuss the rough vol-of-vol setting, where Markovianity of the vol-of-vol is not present. We present simulations and benchmarks to establish the efficiency of our method as well as a comparison with market data.

Time-Varying Return Predictability and Adaptive Behavior in The U.S. Commodity Markets During COVID-19

The study investigates the time-varying efficiency of the four most commonly traded international commodities from the U.S. Chicago Board of Options Exchange (CBOE) over a more extended period as well as during COVID-19. The study also explores how adaptive behavior of returns induces profitable opportunities in the commodity markets. Daily returns of commodity indices (gold, silver, oil, metal) are divided into subsamples of six years, to apply a battery of linear/nonlinear tests. The study uncovers the linear and nonlinear serial dependence in returns from commodities and finds evidence of time-varying volatility, thus consistent with the Adaptive Market Hypothesis over the full sample period. Moreover, returns from all the commodities are highly volatile and predictable during COVID-19.

Long Memory and Fractality in the Universe of Volatility Indices

Unlike previous studies that consider the Chicago Board of Options Exchange (CBOE) implied volatility index (VIX), we examine long memory and fractality in the universe of nine CBOE volatility indices. Using daily data from October 5, 2007, to October 5, 2020, covering calm and crisis periods, we find evidence of long memory and fractality in all indices and a change in the degree of volatility persistence, which points to inefficiency. The long memory of the SKEW index is strong before the onset of three crisis periods, but eases afterwards. The findings provide new insights that matter to investment decisions and trading strategies.

Power Exchange Option with a Hybrid Credit Risk under Jump-Diffusion Model

In this paper, we study the valuation of power exchange options with a correlated hybrid credit risk when the underlying assets follow the jump-diffusion processes. The hybrid credit risk model is constructed using two credit risk models (the reduced-form model and the structural model), and the jump-diffusion processes are proposed based on the assumptions of Merton. We assume that the dynamics of underlying assets have correlated continuous terms as well as idiosyncratic and common jump terms. Under the proposed model, we derive the explicit pricing formula of the power exchange option using the measure change technique with multidimensional Girsanov’s theorem. Finally, the formula is presented as the normal cumulative functions and the infinite sums.

Analysis of the development of the foreign exchange market in the Russian Federation

The article focuses on the financial foreign exchange market, the development and condition of which determines the financial well-being of most commercial enterprises of the Russian Federation. The purpose of the research is to give review of the Russian foreign exchange market’ development and situation. The main factors influencing the level of the exchange rate of foreign currencies expressed in national currency are considered.
 The domestic and international foreign exchange market of Russia for the period 2016-2020 is analyzed. The dynamics of conversion operations, the structure of participants in the domestic foreign exchange market by type of currency. The results of trading on the foreign exchange market, futures and options as a currency instrument, the share of options and futures on the futures market of the Russian Federation, as well as the dynamics of the US dollar against the ruble and exchange trading indicators for the period from 2016 to 2020.
 The conditions, results and prospects of the development of the financial foreign exchange market of the Russian Federation are discussed in this article

Predicting Volatility Index According to Technical Index and Economic Indicators on the Basis of Deep Learning Algorithm

The Volatility Index (VIX) is a real-time index that has been used as the first measure to quantify market expectations for volatility, which affects the financial market as a main actor of the overall economy that is sensitive to the environmental and social aspects of investors and companies. The VIX is calculated using option prices for the S&P 500 Index (SPX) and is expressed as a percentage. Taking into account that VIX only shows the implicit volatility of the S&P 500 for the next 30 days, the authors develop a model for a near-optimal state trying to avoid uncertainty and insufficient accuracy. The researchers are trying to make a contribution to the theory of socially responsible portfolio management. The developed approach allows potential investments to make decisions regarding such important topics as ethical investing, performance analysis, as well as sustainable investment strategies. The approach of this research allows to use deep probabilistic convolutional neural networks based on conditional variance as a linear function of errors with the aim of estimating and predicting the VIX. For this purpose, the use of technical indicators and economic indexes such as Chicago Board Options Exchange (CBOE) VIX and S&P 500 is considered. The results of estimating and predicting the VIX with the proposed method indicate high precision and create a certainty in modeling to achieve the goals.

The information content of the volatility index options trading volume

AbstractThis paper investigates the predictive content of the Volatility Index (VIX) options trading volume for the future dynamics of the underlying VIX index. Using a novel data set from the Chicago Board Options Exchange, we calculate the put–call ratio based on the VIX option volume initiated by buyers to open new positions. We show that the put–call ratio negatively predicts the subsequent changes in the VIX index. The predictability is stronger during periods of elevated VIX levels and for short‐dated contracts. These results support the hypothesis that informed traders use the VIX option market as a venue for their trading.

The Condition of the Conditionality

The interdependence of options is common among compound options. Moreover, this interconnectedness is synonymous with probability theory-how a set of axioms are treated. The conditionality, where one option value is dependent on another option, has spilled over to option pricing, especially exchange options. However, it seems that no study has explored whether that simultaneous occurrence of two options is conditional or not. This study uses conditional approaches (Radon–Nikodým derivative and probability theory) to illustrate conditionality in an exchange option. Furthermore, hedging strategy is derived based on straddles. The results show that due to conditionality another exotic option, tri-conditional option (also known as triple option) is derived. The hedging of a triple option encompasses both dynamic and static techniques.

Exchange options for catastrophe risk management

In this paper, we investigate the pricing issue and catastrophe risk management of exchange options. Exchange options allow the holder to exchange its stocks for another at maturity and can be seen as an extended version of catastrophe equity put options with another traded asset price as strike prices. Since option holders have to issue new shares to exercise the option, we illustrate the differences between option prices calculated using pre-exercise and post-exercise share prices. The effects of default risk on option prices and risk management are also considered. Finally, risk management analysis shows that exchange options can effectively hedge catastrophe risk.

BARRIERS TO MENTAL HEALTHCARE IMPROVEMENT IN LOW AND MIDDLE INCOME COUNTRIES

The quality of mental health treatment in low and middle-income countries is a source of concern despite publications claiming that mental healthcare is improv­ing.1 Despite the presence of available evidence, that mental healthcare service development has been slow in pace in most of the developing countries.2 There are various mental health barriers which need to be ad­dressed at this point to overall improve the services improve the delivery of mental health services. Low priority on public health agenda: Mental health has a low priority on national and international pub­lic-health agendas, as evidenced by their low visibility in Millennium Development Goals (MDG) and Sustainable Development Goals (SDGs).3,4 A higher prominence on domestic and international agendas is necessary not just for increased funding, but also for gaining political support for the tough choices that typically accompany mental health reforms due to lack of consensus among stakeholders which leads to contradictory messag­es turning donors and policymakers off. The immi­nent needs are not prioritized on specialist services. Communication is not clear with decision makers and mental health professionals.5 It is also a matter of great concern that lack of public interest in the wellbeing of those with mental disorders may be due to the stigma associated.6-8 Decision-makers' erroneous belief that mental health treatment is not as cost-effective as the care for a variety of the other physical disorders.9,10 Disorganization of services: The greatest impediment to decentralization and systematic disenfranchisement is the entrenched interests of mental health and hos­pital staff, who fear losing their power base and being compelled to relocate to rural regions. Service consum­ers and family organizations frequently support the old system because they are ignorant of the benefits.11 In a nutshell, a homogenous model of services that must be available for everyone that may prioritizes nurtur­ing and replenishing mental health services in primary care setting that can best serve individuals who suffer from mental illnesses, is missing. Dearth of mental health work force: Only a few people pursue mental healthcare as a profession, thus there aren't enough people qualified to provide it.12 Higher pay in private practise and abroad, on the other hand, incentivize even this workforce to quit government em­ployment or even the nation leading to brain drain. Fur­thermore, there are little incentives for mental health specialists to remain in rural areas, where the majority of the country's population resides. To diversify the workforce, flexibility and creativity is required, includ­ing increase in the number of mental health training programs for working professionals in accordance with authorities' guidelines and regulations. As a result, the function of a mental health practitioner in the commu­nity is expected to shift from clinical care provider to ongoing trainer and supervisor.2 Lack of effective leadership in public health: Most Mental health leaders in low and middle income coun­tries lack public health abilities, and there is a paucity of mental health leaders with public-health training. Senior mental health professionals who are promoted to national mental health leaders frequently focus on individual therapeutic care rather than community-ori­ented actions.2 Few colleges across the world provide public mental health courses to prepare future mental health administrators, planners, and leaders. There are just a few international training and exchange options for leaders to improve their public mental health skills.2 Natural and Man-made Disasters: A recent hurdle in developing countries like Pakistan has been the issues related to natural and man-made disasters including drought, fires, accidents, earthquake, floods and ter­rorism.13 This is harming not just the country's econ­omy, but the ever-changing dynamics of the situation are making it difficult for the general populace to settle and adjust to the circumstances, rendering them vul­nerable to mental health problems. This disruption is aggravating existing mental healthcare issues, as there is no coverage for this additional percentage of the population. Imperfection of Mental Health Infor­mation System: Lacunae in the information system is a hurdle in providing just and and equitable mental health services and this has a general impact on all areas of mental health service provision.14 Inappropriate Legislation: Inappropriate legislation and enforcement of existing laws is a major challenge for health systems in developing countries.15 The need of the day is to establish psy­chiatric treatment services in general hospi­tals and the development of mental health­care in primary care and other health-care settings for societal and communal needs. Also, international cooperation is needed along with local and national efforts to over­come the barriers. In addition, advocacy for persons with mental illnesses may shape po­litical will which has the capacity to increase the chances of availability and access to humane mental health treatment. For the development of community mental health services, in addition to the emphasis on the inclusion of mental health in primary care, services at the secondary care level should be prioritized in the community taking all stakeholders on board.

Оценка биржевых вариантов привлечения внешнего финансирования субъектами малого и среднего предпринимательства

Introduction. The choice and justification of options for attracting investments are relevant for the development of any organization. The research objective was to assess exchange-traded options for attracting investment by small and medium businesses in the food and processing industry.
 Study objects and methods. The research featured small and medium businesses in the food and processing industry and their exchange options for attracting external financing. The study was based on system, situational, structural-functional, and process approaches, as well as methods of comparative and factor analysis, grouping, and sociological research techniques.
 Results and discussion. The authors described, analyzed, and classified ways to attract external financing by small and medium businesses. Exchange-traded options proved to be associated with the circulation of securities that differ in liquidity, direct access to the owners of funds, and access to a potentially unlimited amount of investment capital. The authors analyzed the existing exchange infrastructure for the businesses under consideration and assessed their potential for issuing securities. Based on such indicators as Average EBIT Margin and Compound Annual Growth Rate (CAGR), small and medium food-related enterprises can issuer securities, especially exchange-traded bonds. Exchange-traded bonds demonstrated a number of serious disadvantages, compared to a traditional bank loan. However, issuers of securities receive guaranteed advantages, e.g. more flexible conditions for raising funds on the exchange, the right to state subsidies for the payment of coupon income, partial compensation for the costs of placing securities, the absence of collateral, a wide range of private investors, etc. Using some real cases, the authors evaluated the liquidity of exchange-traded bonds of small and medium businesses in the food and processing industry according to a number of indicators of profitability and liquidity of securities.
 Conclusion. Exchange options can be used to finance small and medium food-related businesses, based on the established ex-change infrastructure, government incentives, potential of the food sector, average EBIT profitability, and revenue growth.

Time-frequency information transmission among financial markets: evidence from implied volatility

In this paper, we utilize the Chicago Board Option Exchange (CBOE) implied volatility indices to estimate the time-frequency information transmission among financial markets from 01.08.2008 to 31.10.2019. In doing so, we utilize the rolling window wavelet correlation (RWWC), Diebold & Yilmaz (The Economic Journal 119: 158–171, 2012), and Barunik & Krehlik (Journal of Financial Econometrics 16: 271–296, 2018). Our empirical findings suggest short-term and long-term dynamic connectedness between implied volatility indices of alternative assets. The long-term analysis findings suggest potential hedging and diversification opportunities that can be exploited by taking offsetting positions across volatility indices. The findings confirm heterogeneity between short-term and long-term connectedness results. Our findings also show superior out of sample hedging effectiveness of GVZ. The implications of the findings are further discussed in the paper.

Implied volatility estimation of bitcoin options and the stylized facts of option pricing

The recently developed Bitcoin futures and options contracts in cryptocurrency derivatives exchanges mark the beginning of a new era in Bitcoin price risk hedging. The need for these tools dates back to the market crash of 1987, when investors needed better ways to protect their portfolios through option insurance. These tools provide greater flexibility to trade and hedge volatile swings in Bitcoin prices effectively. The violation of constant volatility and the log-normality assumption of the Black–Scholes option pricing model led to the discovery of the volatility smile, smirk, or skew in options markets. These stylized facts; that is, the volatility smile and implied volatilities implied by the option prices, are well documented in the option literature for almost all financial markets. These are expected to be true for Bitcoin options as well. The data sets for the study are based on short-dated Bitcoin options (14-day maturity) of two time periods traded on Deribit Bitcoin Futures and Options Exchange, a Netherlands-based cryptocurrency derivative exchange. The estimated results are compared with benchmark Black–Scholes implied volatility values for accuracy and efficiency analysis. This study has two aims: (1) to provide insights into the volatility smile in Bitcoin options and (2) to estimate the implied volatility of Bitcoin options through numerical approximation techniques, specifically the Newton Raphson and Bisection methods. The experimental results show that Bitcoin options belong to the commodity class of assets based on the presence of a volatility forward skew in Bitcoin option data. Moreover, the Newton Raphson and Bisection methods are effective in estimating the implied volatility of Bitcoin options. However, the Newton Raphson forecasting technique converges faster than does the Bisection method.

The Theory of Uncertaintism

The stock jumps of the underlying assets underpinning the Margrabe options have been studied by Cheang and Chiarella [Cheang, GH and Chiarella C (2011). Exchange options under jump-diffusion dynamics. Applied Mathematical Finance, 18(3), 245–276], Cheang and Garces [Cheang, GHL and Garces LPDM (2020). Representation of exchange option prices under stochastic volatility jump-diffusion dynamics. Quantitative Finance, 20(2), 291–310], Cufaro Petroni and Sabino [Cufaro Petroni, N and Sabino P (2020). Pricing exchange options with correlated jump diffusion processes. Quantitate Finance, 20(11), 1811–1823], and Ma et al. [Ma, Y, Pan D and Wang T (2020). Exchange options under clustered jump dynamics. Quantitative Finance, 20(6), 949–967]. Although the authors argue that they explored stock jumps under Hawkes processes, those processes are the Poisson process in their applications. Thus, they studied Hawkes processes in-between two assets while this study explores Hawkes process within any asset. Furthermore, the Poisson process can be flipped into Hawkes process and vice versa. In terms of hedging, this study uses specific Greeks (rho and phi) while some of the mentioned studies used other Greeks (Delta, Theta, Vega, and Gamma). Moreover, hedging is carried out under static and dynamic environments. The results illustrate that the jumpy Margrabe option can be extended to complex barrier option and waiting to invest option. In addition, hedging strategies are robust both under static and dynamic environments.

Convertible bond valuation with regime switching

We present a valuation formula for convertible bonds with regime-switching market conditions by decomposing the convertible bond into a coupon-bearing bond and the American-type exchange option. A coupon-bearing bond component is modeled with a four-factor model: a two-factor affine model for the risk-free rate and a two-factor affine model with stochastic volatility for the credit spreads on the coupon-bearing bond component. We also derive a new valuation formula for the American-type exchange option component.