ETFs Premiums and Discounts
The value of an ETF is obtained from measuring its net asset value (NAV) at the closing of each trading day. If the ETF has a higher market price relative to the net asset value, it is said to be…
ETF Bid-Ask Spread
The bid-ask spread is the variation between the price at which a buyer is willing to purchase a security and the price at which the seller is willing to offer the same security. The market structure and liquidity of the…
ETFs Tracking Error
The tracking error of a fund is the annualized standard deviation of the differences in the daily ETF’s returns, based on its net asset value (NAV), and the benchmark index returns. The ETF’s reported tracking error is useful to investors….
ETFs in Secondary Markets
Secondary market trading involves buying and selling of ETFs on exchanges. The trade happens between any pair of market participants, i.e, individual or institutional investors, market makers, and so on. The selling activities of individual investors in the secondary…
Creation or Redemption Process of ETFs
An exchange-traded fund (ETF) is an investment fund that holds assets such as bonds, stocks, and commodities and is traded on the stock exchange. An ETF operates with an arbitrage mechanism planned to keep it trading close to its net…
Role of Gamma Risk in Options Trading
Gamma measures the risk that remains once a portfolio is delta neutral (non-linearity risk). The BSM model assumes that share prices change continuously with time. In reality, however, stock prices do not move continuously. Instead, they often jump, and this…
Describe How a Delta Hedge is Executed
Delta hedging involves adding up the deltas of the individual assets and options that make up a portfolio. A delta hedged portfolio is one for which the weighted sums of deltas of individual assets are zero. A position with a…
Option Greeks
The Greeks are a group of mathematical derivatives applied to help manage or understand portfolio risks. They include delta, gamma, theta, vega, and rho. Delta Delta is the rate of change of the option’s price attributable to a given change…
Black Model Valuation of Interest Rate Options and Swaptions
Interest Rate Options The underlying instrument in an interest rate swap is a reference interest rate. Reference rates include the Fed funds rate, LIBOR, and the rate on benchmark US Treasuries. Interest rate options are, therefore, options on forward rate…
Black Option Valuation Model
The Black options valuation model is a modified version of the BSM model used for options on underlying securities that are costless to carry, including options on futures and forward contracts. Similar to the BSM model, the Black model assumes…
