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---------------------- Forwarded by Vince J Kaminski/HOU/ECT on 03/17/2000
04:07 PM --------------------------- Anjam Ahmad 03/17/2000 11:44 AM To: Ali Lloyd/LON/ECT@ECT, Tom Glover/LON/ECT@ECT, Imtiaz Ahmad/LON/ECT@ECT, Christian Hanell/LON/ECT@ECT, Chris Thrall/LON/ECT@ECT cc: Stinson Gibner/HOU/ECT@ECT, Grant Masson/HOU/ECT@ECT, Dale Surbey/LON/ECT@ECT, Bjarne Schieldrop/OSL/ECT@ECT, Vince J Kaminski/HOU/ECT@ECT Subject: Half-Hourly Option Forward Volatilities Dear all, Firstly, apologies for the delay in finalising this study; a considerable amount of data analysis was required. The idea is to aggregate monthly, weekly and daily volatilities such that we can price individual options on half hours into the future. We have a reliable methodology for the monthly vol curve at the EFA slot level. The first issue to address was to use a "reverse basvol" to estimate the monthly vol curve at the half-hourly level of detail. This required an estimation of half-hourly price return correlations. This resulted in a scaling factor of approximately 1.30 that is applied to all EFA vols to convert to half-hourly (the scaling factors are slightly different by EFA slot, but not by nearly as much as might be expected). For the weekly and hourly half hourly vols, a historical analysis was carried out on the past few years data; a weighting-scheme was applied to add more emphasis to standard deviations calculated on more recent data. COMBINING THE VOLATILITIES The idea is to let the monthly vol curve get us to the start of the month and then assume that all half hours are positioned at 2 weeks and 3 days into the next month. The volatility is aggregated using these time-weightings to ensure that we don't have a wildly different volatility for the options at the start of a month and at the end of a month. Below is an example for half hour #38: I put the spreadsheet HalfHourlyVolModel.xls into the public directory, S:\RESEARCH\ANJAM\HHOPTIONVOLMODEL\. I suggest we use the matrix of forward volatilities on the summary page and see what kind of numbers we get. There may need to be some fine-tuning of the time-weightings, but in general, I believe we can start utilising these semi-final numbers. Regards, Anjam x35383
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