plot annual historical volatility with 1-year implied volatility in a graph

INSTRUCTIONS TO CANDIDATES

ANSWER ALL QUESTIONS

Q1 Plot annual historical volatility with 1-year implied volatility in a graph.                                          (2 marks)

Q2 Referring to the graph in Q1, analyse the relationship between historical volatility and implied volatility. Hint: consider volatility cross-over, mean reversion, descriptive statistics etc.             (6 marks)

Q3 From your analysis above, develop a delta neutral strategy for the period 26/02/2021 to 12/03/2021 to speculate/arbitrage on volatility. Explain how the strategy will work, and detail all transactions for undertaking the strategy. You can use as much capital as you like, but the cost of capital needs to be considered. Given that the strategy is theoretically risk free, you should not lose any money anyway! You are required to perform at least one rebalancing.                                                                                            (9 points)

Q4 At the end of the period, close all the positions and evaluate the effectiveness of your strategy.

           (6 points)

 

REPORT WRITING. Your report must document a complete discussion of the process outlined above, including full details of transactions executed. Transaction costs must bear evidence that it is a realistic figure. Good structure, presentation and concise writing skills are likewise important. Your report length can be a MAXIMUM of 5 pages (size 12 font, 1.5 spacing), including all discussion, graphs, tables and references.                                                                                                                                                                    (2 marks)

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