A tool for assessing market risk. VAR measures the expected maximum loss at a given confidence interval over the holding period.
Vega
Measures the change in the option’s premium for each 1% change in the underlying instrument’s volatility.
Volatility
1) Refers to the price or yield of a security or market to rise or fall. Measured by the variance and standard deviation of the security. 2) Bond price volatility refers to the change in the bond price given a change in yields. See: Dollar value of a basis point.
Volatility curve
A curve depicting the relationship between implied volatility and time to expiration.
Volatility skew
A graph that depicts the relationship between implied volatility and the strike prices of options with the same expiration dates. Implied volatility is on the Y-axis and the options’ strike prices are on the X-axis and the resulting curve is skewed. Different markets exhibit curves of different shapes.
Volatility smile
A graph that depicts the relationship between implied volatility and the strike prices of options with the same expiration dates. Implied volatility is on the Y-axis and the options’ strike price is on the X-axis and the resulting curve is in the shape of a smile.
