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The aim of this study is to examine the “volatility smile” or/and “skew”, term structure and implied volatility surfaces based on those European options written in the standard and poor (S&P) Nifty equity index. The stochastic nature of implied volatility across strike price, time-to-expiration and moneyness violates the core assumption of the Black–Scholes option pricing model.

The potential determinants of implied volatility are the degree of moneyness, time-to-expiration and the liquidity of the strikes. The empirical work has been expressed by means of a simple ordinary least squares (OLS) framework and presents the estimation results according to moneyness, time-to-expiration and liquidity of options.

The options data give evidence of the existence of a classical U-shaped volatility smile for the Indian options market. Indeed, there is some evidence that the “volatility smirk” which pertains to 30-day options and also implied volatility remain higher for the shorter maturity options and decrease as the time-to-expiration increases. The results lead us to believe that in-the-money calls and out-of-the-money puts are of higher volatility than at-the-money options. Conclusion was drawn due to the persistence of the smile in the options market.

The practical implication of studying stylized patterns of implied volatility is that it educates the volatility traders about how in-the-money and out-of-the-money options are priced in the options market, and provides an estimate of volatility for the pricing of future options.

This study is an extension of previous work. The undertaking has been to examine the case of a more liquid and transparent options market, which is missing from the earlier work. The current study is more relevant because, since 2008, significant changes have been observed in the futures and options market in India.

The purpose of this paper is to understand the patterns of the implied volatility (IV) of the Indian index option market and its relationship with moneyness (called the volatility smile). Its goal is also to ascertain the determinants of IV.

For this purpose, IVs were computed from the daily call and put data of CNX Nifty index options from April 2004 to March 2014. The patterns of IVs were analysed using univariate parametric tests. Multivariate regression analyses were conducted to understand the relationships observed. Resultantly, vector autoregressions were performed to assess the determinants of IV.

The results suggested that there was asymmetric volatility across time and strike prices using alternative measures of moneyness. Furthermore, it was found that the IV of lower strike prices was significantly higher (lower) than that of higher strike prices for call (put) options. Put IV was observed to be higher than call IV irrespective of any attributes. The results further showed that current-month contracts have significantly higher IV than those for next month and those were followed by far-month contracts. Nifty futures’ volumes and momentum were found to be significant determinants of IV.

The behaviour of the volatility smile is important when accounting for the Vega risks in the portfolios of hedge fund managers. While taking a position, besides the Black-Scholes-Merton (BSM) model’s input factors, investors must consider the previous behaviour of volatility, a market’s microstructures and its liquidity for a put option contract. They must also consider the attributes of the underlying for a call option contract.

This is the first decadal study (the longest span of data for any international study on this subject) to confirm the existence of the volatility smile for the index options market in India. It examines and confirms the smile’s asymmetry patterns for different definitions of moneyness, as well as option types, the tenure of options contracts and the different phases of market conditions. It further helps to identify the determinants of IV and so has renewed importance for traders.

The purpose of this paper is to test the pricing performance of Black-Scholes (B-S) model, with the volatility of the underlying estimated with the two-scale realised volatility measure (TSRV) proposed by Zhang et al. (2005).

The ex post TSRV is used as the volatility estimator to ensure efficient volatility estimation, without forecasting error. The B-S option prices, thus obtained, are compared with the market prices using four performance measures, for the options on NIFTY index, and three of its constituent stocks. The tick-by-tick data are used in this study for price comparisons.

The B-S model shows significantly negative pricing bias for all the options, which is dependent on the moneyness of the option and the volatility of the underlying.

The negative pricing bias of B-S model, despite the use of the more efficient TSRV estimate, and post facto volatility values, confirms its inadequacy. It also points towards the possible existence of volatility risk premium in the Indian options market.

The use of tick-by-tick data obviates the nonsynchronous error. TSRV, used for estimating the volatility, is a significantly improved estimate (in terms of efficiency and bias), as compared to the estimates based on closing data. The use of ex post realised volatility ensures that the forecasting error does not vitiate the test results. The sample is selected to be large and varied to ensure the robustness of the results.

The purpose of this paper is to ascertain the effectiveness of major deterministic and stochastic volatility-based option pricing models in pricing and hedging exchange-traded dollar–rupee options over a five-year period since the launch of these options in India.

The paper examines the pricing and hedging performance of five different models, namely, the Black–Scholes–Merton model (BSM), skewness- and kurtosis-adjusted BSM, NGARCH model of Duan, Heston’s stochastic volatility model and an ad hoc Black–Scholes (AHBS) model. Risk-neutral structural parameters are extracted by calibrating each model to the prices of traded dollar–rupee call options. These parameters are used to generate out-of-sample model option prices and to construct a delta-neutral hedge for a short option position. Out-of-sample pricing errors and hedging errors are compared to identify the best-performing model. Robustness is tested by comparing the performance of all models separately over turbulent and tranquil periods.

The study finds that relatively simpler models fare better than more mathematically complex models in pricing and hedging dollar–rupee options during the sample period. This superior performance is observed to persist even when comparisons are made separately over volatile periods and tranquil periods. However the more sophisticated models reveal a lower moneyness-maturity bias as compared to the BSM model.

The study concludes that incorporation of skewness and kurtosis in the BSM model as well as the practitioners’ approach of using a moneyness-maturity-based volatility within the BSM model (AHBS model) results in better pricing and hedging effectiveness for dollar–rupee options. This conclusion has strong practical implications for market practitioners, hedgers and regulators in the light of increased volatility in the dollar–rupee pair.

Existing literature on this topic has largely centered around either US equity index options or options on major liquid currencies. While many studies have solely focused on the pricing performance of option pricing models, this paper examines both the pricing and hedging performance of competing models in the context of Indian currency options. Robustness of findings is tested by comparing model performance across periods of stress and tranquility. To the best of the author’s knowledge, this paper is one of the first comprehensive studies to focus on an emerging market currency pair such as the dollar–rupee.

Informed trading has a strong liaison with the options market, as the risk in the options market is limited to the premium, leverage is high and the transaction cost is less. The purpose of this paper is to analyze the effect of options availability on the informed trading, occurring well before the merger and acquisition (M&A) announcements along with the crisis period and regulation effect.

The study employs event study methodology for 864 M&A announcements done by Indian acquiring companies in order to compute the abnormal returns and also examine the implied volatility and volume of call, putting options for the robustness check.

The results indicate that option listing status increases the possibility and magnitude of informed trading in the M&As, which gets more/less pronounced during and immediately after the crisis period when new regulatory reforms are introduced.

This study contributes to the efficient market theory and affirms that stock market of acquiring companies in India follow a semi-strong form of market efficiency around M&A announcements in the presence of options market.

The purpose of this paper is to ascertain the pattern of the implied volatility function for currency options traded on the National Stock Exchange of India (NSE), identify its potential determinants and to investigate any seasonality in the pattern.

The paper examines four different specifications for the implied volatility smile of exchange-traded dollar-rupee options. These specifications are tested by running Ordinary Least Squares (OLS) regressions on a daily basis for all options over the entire sample period. Seven potential determinants for the shape of the volatility function are identified. Contemporaneous and lead-lag relationships between these determinants and the shape of the volatility function are examined using OLS and multivariate VAR. Impulse response functions are employed to test the strength and persistence of the lead-lag relations. Seasonality of the smile pattern is tested using OLS.

The study shows that the implied volatility function for dollar-rupee options is asymmetric and varies with the time to maturity of the option. Historical volatility, momentum and jumps in the exchange rate, time to maturity, traded volume of options and volatility in the stock market appear to Granger-cause the shape of the volatility smile. Feedback causality is observed from the shape of the smile to the volatility, momentum and jumps in the exchange rate and trading volume of currency options. A weak day-of-the-week effect is observed in the pattern of the volatility smile.

The study sheds light on the potential determinants of the smile and highlights the predictive power of the smile which findings can be useful to market practitioners for pricing and hedging of dollar-rupee options. The study has strong practical implications during a period of increased volatility in the dollar-rupee pair.

Most of the existing literature regarding implied volatility smiles has focused either on the volatility smile of US equity index options or that of major liquid currencies. There is a need for such studies in the context of options on emerging market currencies such as the Indian rupee which are characterized by thin trading and frequent central bank intervention and signaling. To the best of the author’s knowledge this study is the first to focus on the volatility smile of exchange-traded options on the US dollar–Indian rupee.

The purpose of this paper is to examine the lead‐lag relationships between the National Stock Exchange (NSE) Nifty stock market index (in India) and its related futures and options contracts, and also the interrelation between the derivatives markets.

The paper uses serial correlation of return series and autoregressive moving average (ARMA) model for studying the lead‐lag relationship between hourly returns on the NSE Nifty index and its derivatives contracts like futures, call and put options. Further, the lead‐lag relation between hourly returns of the derivatives contracts among themselves is also studied using ARMA models.

The ARMA analysis shows that the NSE Nifty derivatives markets tend to lead the underlying stock index. The futures market clearly leads the cash market although this lead appears to be eroding slightly over time. Although the options market leads the cash overall, there is some feedback between the two with the underlying index leading at times. Further, it is found that the index call options lead the index futures more strongly than futures lead calls, while the futures lead puts more strongly than the reverse.

The results imply that the derivative contracts on NSE Nifty lead the underlying cash market. Thus, the derivative markets are indicative of futures price movements and this will certainly be helpful to potential investors to design their risk‐return portfolio while investing in stocks and derivatives contracts.

This paper is an original piece of work towards exploring the lead‐lag relation between NSE Nifty and the derivative contracts. The issue of price discovery on futures and spot markets and the lead‐lag relationship are topics of interest to traders, financial economists, and analysts.

The purpose of this paper is to examine the cross-sectional predictive power and the information content of volatility smirks for future stock returns using single stock options.

The study uses Fama-Macbeth procedure and portfolio approach to investigate the predictability and informativeness in a setup when options settlement style is changed from American to European.

The study reports that the volatility smirk of European style options, unlike American style options, predict the underlying cross-sectional equity returns. Firms with steepest volatility smirk underperform firms with flatter volatility smirks, by an average of 3.28 and 4.01 per cent annually for American and European options, respectively. The results are robust to the control of idiosyncratic and systematic risk factors.

The results confirm that a trader with negative information prefers to trade out-of-the-money put options. The more pronounced results of European options designate the trader’s preference to less risky European style stock options. Results are robust and signify the delay of equity market in incorporating information impounded in the volatility smirk.

Very few studies examine smirk and returns relationship and to the best of the authors’ knowledge, no study exists that examine the unique case of change in options style and its role in affecting relationship between smirk and future returns.

Interviewing the protagonist and collecting information from secondary resources such as company documents, company and competitor websites, industry reports and online databases like Euromonitor International.

The case explores the metamorphosis of JK Masale from a small-scale family business in India to a regional player. Over a period of six decades, JK Masale (JKM) has emerged against the backdrop of a fiercely competitive spice industry. India, being a confluence of varied regional cultures, poses a diverse consumption pattern. It varies to a great extent with respect to the specific food habits prevalent in each climatic zone of the country. While the brand had successfully captured the Eastern Market and the western market of the country, Mr. Vikash Jain, Managing Director of JK Masale, contemplated to venture in Southern India and introduce new product categories. The case delves into one of the major challenges faced by JKM over the brand architecture and labelling across product categories. Thus, the case provides an excellent opportunity for budding managers to: analyse the company’s performance in the backdrop of a dynamic competitive environment; understand the nature of strategic decision-making and its appropriateness for a small family-owned business; evaluate a brand amongst brands on the architectural framework and select appropriate brand architecture for new products; and understand applicability and risks associated with growth strategies.

The case study can be positioned in both undergraduate and postgraduate level programs for courses on marketing strategy and brand management. Primarily, this case would be ideal to discuss brand relationship and brand architecture in the given context. Instructors have an option to cover concepts like market structure, company analysis, growth strategies and emergent and deliberate strategy through the case.

This study aims to examine the cross-market efficiency of the FTSE/MIB index options contracts traded on the Italian derivatives market (IDEM) during a period including the financial crisis between 1st October 2007 and 31st December 2012 using daily option prices.

Two fundamental no-arbitrage conditions were tested: the lower boundary condition (LBC) and the put–call parity (PCP) condition while taking into account the role of transaction costs in mitigating the number of violations reported. Ex post tests of LBC and PCP revealed a low incidence of mispricing in this market. Furthermore, to check the robustness of the results obtained by the ex post tests, ex ante tests were applied to PCP violations occurring within a one-day lag.

The results showed a significant drop in the number of profitable arbitrage strategies. The findings obtained from all these tests generally support the cross-market efficiency of the Italian index options market during the sample period, though some violations were occasionally reported. Overall, the number and monetary value of the violations reported declined during the post-financial crisis period compared to those during the financial crisis period.

This study can be extended to test the relationships between arbitrage profitability and other factors such as the moneyness (in the money, out of the money, at the money) of options and the maturity of options. Options market efficiency tests can be conducted such as call and put spreads, box spreads and put/call convexities (butterfly spreads).

There are several factors that influenced the decision to test the Italian index options market. First, the limited number of studies conducted on this market. Second, the fact that the two main studies on this market are relatively old, which makes it interesting to test the efficiency of this market with respect to a new set of data, taking into account the introduction of the Euro and the impact of the recent financial crisis on this market and whether the market efficiency hypothesis holds during the period of crisis. Third, it is important to consider the effect of the new rules applied to this market.