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Break-Even Volatility
A profit or loss (P&L) of a dynamically hedged option depends on the implied volatility used to price the option and implement the hedges. Break-even volatility is a method of solving for the volatility which yields no profit or loss based on replicating the hedging procedure of an option on a histo...
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| Format: | Thesis |
| Language: | English |
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African Institute of Financial Markets and Risk Management
2020
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| _version_ | 1867613170957287424 |
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| access_status_str | Open Access |
| author | Mitoulis, Nicolas |
| author2 | Taylor, David |
| author_browse | Mitoulis, Nicolas Taylor, David |
| author_facet | Taylor, David Mitoulis, Nicolas |
| author_sort | Mitoulis, Nicolas |
| collection | Thesis |
| description | A profit or loss (P&L) of a dynamically hedged option depends on the implied volatility used to price the option and implement the hedges. Break-even volatility is a method of solving for the volatility which yields no profit or loss based on replicating the hedging procedure of an option on a historical share price time series. This dissertation investigates the traditional break-even volatility method on simulated data, how the break-even formula is derived and details the implementation with reference to MATLAB. We extend the methodology to the Heston model by changing the reference model in the hedging process. Resultantly, the need to employ characteristic function pricing methods arises to calculate the Heston model sensitivities. The break-even volatility solution is then found by means of an optimisation of the continuously delta hedged P&L over the Heston model parameters. |
| format | Thesis |
| id | oai:open.uct.ac.za:11427/30980 |
| institution | University of Cape Town (South Africa) |
| language | eng |
| last_indexed | 2026-06-10T12:31:53.390Z |
| license_str | Not specified — see source repository |
| provenance_str_mv | Harvested via OAI-PMH from UCTD — University of Cape Town Open Access Repository |
| publishDate | 2020 |
| publishDateRange | 2020 |
| publishDateSort | 2020 |
| publisher | African Institute of Financial Markets and Risk Management |
| publisherStr | African Institute of Financial Markets and Risk Management |
| record_format | dspace |
| source_str | UCTD — University of Cape Town Open Access Repository |
| spelling | oai:open.uct.ac.za:11427/30980 Break-Even Volatility Mitoulis, Nicolas Taylor, David Mahomed, Obeid Mathematical Finance A profit or loss (P&L) of a dynamically hedged option depends on the implied volatility used to price the option and implement the hedges. Break-even volatility is a method of solving for the volatility which yields no profit or loss based on replicating the hedging procedure of an option on a historical share price time series. This dissertation investigates the traditional break-even volatility method on simulated data, how the break-even formula is derived and details the implementation with reference to MATLAB. We extend the methodology to the Heston model by changing the reference model in the hedging process. Resultantly, the need to employ characteristic function pricing methods arises to calculate the Heston model sensitivities. The break-even volatility solution is then found by means of an optimisation of the continuously delta hedged P&L over the Heston model parameters. 2020-02-11T07:44:08Z 2020-02-11T07:44:08Z 2019 2020-01-29T09:38:56Z Master Thesis Masters MPhil http://hdl.handle.net/11427/30980 eng application/pdf African Institute of Financial Markets and Risk Management Faculty of Commerce |
| spellingShingle | Mathematical Finance Mitoulis, Nicolas Break-Even Volatility |
| thesis_degree_str | Master's |
| title | Break-Even Volatility |
| title_full | Break-Even Volatility |
| title_fullStr | Break-Even Volatility |
| title_full_unstemmed | Break-Even Volatility |
| title_short | Break-Even Volatility |
| title_sort | break even volatility |
| topic | Mathematical Finance |
| url | http://hdl.handle.net/11427/30980 |
| work_keys_str_mv | AT mitoulisnicolas breakevenvolatility |