Trade of the month: Volatility skew

Trade of the month: Volatility skew

smoke-volatility

The majority of retail structured products are linked to equity indexes, so the pricing of the products and the terms they can offer depend on the pricing parameters of these underlying indexes. It is easy to understand the effect of implied volatility and dividend yields on option pricing: the higher the level of volatility, the more expensive the option. Higher dividend yields decrease the price of call options because the forward or expected future level of the index is reduced.

A more subtle

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