A tangent line to a function at a point is the line that best approximates the function at that p... more A tangent line to a function at a point is the line that best approximates the function at that point better than any other line. The slope of the function at a given point is the slope of the tangent line to the function at that point. The derivative of f at x = a is the slope, m, of the function f at the point x = a (if m exists), denoted by f (a) = m. All other notations:
Beta (β) 1 is one of the risk management tools to capture the risk exposures of hedge-fund invest... more Beta (β) 1 is one of the risk management tools to capture the risk exposures of hedge-fund investments. As most of hedge funds today trade derivative securities, the research on the measurement of derivative beta is important. The aim of this paper is to examine the factors, which may have impacts on option beta in the United States market. My hypothesis is comprised into three main parts. First, I hypothesize that 5 variables (type of option, strike price, days to maturity, firm size and book to market ratio) have linear relationship with the option beta. Second, I hypothesize that the strength of linear relationship is varied by the type of the industry. Third, I hypothesize that the strength of linear relationship is also varied by these 5 types of variables itself. To begin the process, I use regression method to estimate the beta of underlying stock. Then, I estimate the option beta by multiplying the beta of underlying stock and the option elasticity. I then use regression method to test whether the 5 variables have linear relationship with option beta. I find that 3 variables (type of option, strike price and days to maturity) have the most significant linear relationship with option beta, while firm size has less significant linear relationship and book to market ratio have no significant linear relationship. Furthermore, using 2-way ANOVA, I test whether strength of linear relationship is varied by the type of the industry and the 5 types of variables. There is not enough evidence to infer that the strength of linear relationship between the 5 variables to option beta is varied by the type of the industry, instead, there is enough evidence to infer that the strength of linear relationship between the 5 variables to option beta is varied by the type of variables.
The emergence and growth of the market for derivative instruments can be traced back to the willi... more The emergence and growth of the market for derivative instruments can be traced back to the willingness of risk averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. Derivatives are meant to facilitate the hedging of price risks of inventory holdings or a financial/commercial transaction over a certain period. By locking in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors, and thereby, serve as instruments of risk management. By providing investors and issuers with a wider array of tools for managing risks and raising capital, derivatives improve the allocation of credit and the sharing of risk in the global economy, lowering the cost of capital formation and stimulating economic growth. Now that world markets for trade and finance have become more integrated, derivatives have strengthened these important linkages between global markets, increasing market liquidity and efficiency, and have facilitated the flow of trade and finance. Following the growing instability in the financial markets, the financial derivatives gained prominence after 1970. In recent years, the market for financial derivatives has grown in terms of the variety of instruments available, as well as their complexity and turnover. Financial derivatives have changed the world of finance through the creation of innovative ways to comprehend, measure, and manage risks. India's tryst with derivatives began in 2000 when both the NSE and the BSE commenced trading in equity derivatives. In June 2000, index futures became the first type of derivate instruments to be launched in the Indian markets, followed by index options in June 2001, options in individual stocks in July 2001, and futures in single stock derivatives in November 2001. Since then, equity derivatives have come a long way. New products, an expanding list of eligible investors, rising volumes, and the best risk management framework for exchange-traded derivatives have been the hallmark of the journey of equity derivatives in India so far.
The emergence and growth of the market for derivative instruments can be traced back to the willi... more The emergence and growth of the market for derivative instruments can be traced back to the willingness of risk averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. Derivatives are meant to facilitate the hedging of price risks of inventory holdings or a financial/commercial transaction over a certain period. By locking in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors, and thereby, serve as instruments of risk management. By providing investors and issuers with a wider array of tools for managing risks and raising capital, derivatives improve the allocation of credit and the sharing of risk in the global economy, lowering the cost of capital formation and stimulating economic growth. Now that world markets for trade and finance have become more integrated, derivatives have strengthened these important linkages between global markets, increasing market liquidity and efficiency, and have facilitated the flow of trade and finance. Following the growing instability in the financial markets, the financial derivatives gained prominence after 1970. In recent years, the market for financial derivatives has grown in terms of the variety of instruments available, as well as their complexity and turnover. Financial derivatives have changed the world of finance through the creation of innovative ways to comprehend, measure, and manage risks. India's tryst with derivatives began in 2000 when both the NSE and the BSE commenced trading in equity derivatives. In June 2000, index futures became the first type of derivate instruments to be launched in the Indian markets, followed by index options in June 2001, options in individual stocks in July 2001, and futures in single stock derivatives in November 2001. Since then, equity derivatives have come a long way. New products, an expanding list of eligible investors, rising volumes, and the best risk management framework for exchange-traded derivatives have been the hallmark of the journey of equity derivatives in India so far.
A tangent line to a function at a point is the line that best approximates the function at that p... more A tangent line to a function at a point is the line that best approximates the function at that point better than any other line. The slope of the function at a given point is the slope of the tangent line to the function at that point. The derivative of f at x = a is the slope, m, of the function f at the point x = a (if m exists), denoted by f (a) = m. All other notations:
Beta (β) 1 is one of the risk management tools to capture the risk exposures of hedge-fund invest... more Beta (β) 1 is one of the risk management tools to capture the risk exposures of hedge-fund investments. As most of hedge funds today trade derivative securities, the research on the measurement of derivative beta is important. The aim of this paper is to examine the factors, which may have impacts on option beta in the United States market. My hypothesis is comprised into three main parts. First, I hypothesize that 5 variables (type of option, strike price, days to maturity, firm size and book to market ratio) have linear relationship with the option beta. Second, I hypothesize that the strength of linear relationship is varied by the type of the industry. Third, I hypothesize that the strength of linear relationship is also varied by these 5 types of variables itself. To begin the process, I use regression method to estimate the beta of underlying stock. Then, I estimate the option beta by multiplying the beta of underlying stock and the option elasticity. I then use regression method to test whether the 5 variables have linear relationship with option beta. I find that 3 variables (type of option, strike price and days to maturity) have the most significant linear relationship with option beta, while firm size has less significant linear relationship and book to market ratio have no significant linear relationship. Furthermore, using 2-way ANOVA, I test whether strength of linear relationship is varied by the type of the industry and the 5 types of variables. There is not enough evidence to infer that the strength of linear relationship between the 5 variables to option beta is varied by the type of the industry, instead, there is enough evidence to infer that the strength of linear relationship between the 5 variables to option beta is varied by the type of variables.
The emergence and growth of the market for derivative instruments can be traced back to the willi... more The emergence and growth of the market for derivative instruments can be traced back to the willingness of risk averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. Derivatives are meant to facilitate the hedging of price risks of inventory holdings or a financial/commercial transaction over a certain period. By locking in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors, and thereby, serve as instruments of risk management. By providing investors and issuers with a wider array of tools for managing risks and raising capital, derivatives improve the allocation of credit and the sharing of risk in the global economy, lowering the cost of capital formation and stimulating economic growth. Now that world markets for trade and finance have become more integrated, derivatives have strengthened these important linkages between global markets, increasing market liquidity and efficiency, and have facilitated the flow of trade and finance. Following the growing instability in the financial markets, the financial derivatives gained prominence after 1970. In recent years, the market for financial derivatives has grown in terms of the variety of instruments available, as well as their complexity and turnover. Financial derivatives have changed the world of finance through the creation of innovative ways to comprehend, measure, and manage risks. India's tryst with derivatives began in 2000 when both the NSE and the BSE commenced trading in equity derivatives. In June 2000, index futures became the first type of derivate instruments to be launched in the Indian markets, followed by index options in June 2001, options in individual stocks in July 2001, and futures in single stock derivatives in November 2001. Since then, equity derivatives have come a long way. New products, an expanding list of eligible investors, rising volumes, and the best risk management framework for exchange-traded derivatives have been the hallmark of the journey of equity derivatives in India so far.
The emergence and growth of the market for derivative instruments can be traced back to the willi... more The emergence and growth of the market for derivative instruments can be traced back to the willingness of risk averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. Derivatives are meant to facilitate the hedging of price risks of inventory holdings or a financial/commercial transaction over a certain period. By locking in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors, and thereby, serve as instruments of risk management. By providing investors and issuers with a wider array of tools for managing risks and raising capital, derivatives improve the allocation of credit and the sharing of risk in the global economy, lowering the cost of capital formation and stimulating economic growth. Now that world markets for trade and finance have become more integrated, derivatives have strengthened these important linkages between global markets, increasing market liquidity and efficiency, and have facilitated the flow of trade and finance. Following the growing instability in the financial markets, the financial derivatives gained prominence after 1970. In recent years, the market for financial derivatives has grown in terms of the variety of instruments available, as well as their complexity and turnover. Financial derivatives have changed the world of finance through the creation of innovative ways to comprehend, measure, and manage risks. India's tryst with derivatives began in 2000 when both the NSE and the BSE commenced trading in equity derivatives. In June 2000, index futures became the first type of derivate instruments to be launched in the Indian markets, followed by index options in June 2001, options in individual stocks in July 2001, and futures in single stock derivatives in November 2001. Since then, equity derivatives have come a long way. New products, an expanding list of eligible investors, rising volumes, and the best risk management framework for exchange-traded derivatives have been the hallmark of the journey of equity derivatives in India so far.
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