Econometrics is the "trendy term" for the application mathematics and statistics to economic data. It includes time series analysis and regression analysis.
Friday, 5 July 2013
Tuesday, 2 July 2013
What happens when you square volatility? Why is this important in derivatives pricing?
When you square a volatility you get a smaller number in units of volatility squared. The square of volatility appears in the expressions d1 and d2 in the Black-Scholes pricing formulas for European puts and calls.
For example, the square of 5% is 0.25%. The square of 9% (this looks like an FX vol) is 0.81%. From something small, we get something very small.
For example, the square of 5% is 0.25%. The square of 9% (this looks like an FX vol) is 0.81%. From something small, we get something very small.
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