Questions on Readings (Closed notes)

What is volatility ? It’s a statistical measure of the tendency of market to rise or fall sharply within a short period of time.

How is the Sharpe ratio defined as ? It measures the excess of return per unit of risk

What is meant by « normal distribution of returns » ? 95% of times, return should fall within 2 STD

What is defined as a kurtosis distribution ? It’s the flatness or steepness of a return distribution compared to a normal distribution of returns

What’s a limit order ? It’s an order where you set the execution price as opposed to a « market order »

TRUE / FALSE FACTS ON VOLATILITY 1.Volatility increases more in a falling market than a rising market 2. Option traders sell high volatility and buy low volatility 3. Index arbitrageur tend to create more liquidity on the index futures and therefore more volatility. 4. Volatility is the square root of the variance X √252 T T T T 5. The higher the volatility of the underlyer, the higher the option price T

What is the VIX ? It’s a measure of implied or expected future volatility

What’s the difference between implied and historical (statistical) volatility ? Implied : expected volatility by traders Historical : based on past data

What is a « volatility smile » What kinf of spread trade » can be done using a volatility skew chart? Relationship between implied volatility and strike prices

What does it mean when the ratio of call volatility/put volatility > 1 ? It means calls are priced higher and it assumes the market has a positive bias to the upside.