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  • January 2008
  • Background Note
  • HBS Case Collection

Equity Options

By: Joshua Coval and Erik Stafford
  • Format:Print
  • | Pages:3
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Abstract

The goal of this simulation is to understand the reliance of option values on volatility. When an investor trades an option, they are essentially trading volatility. Therefore, much of the focus in this lesson is on forecasting volatility. Students are able to use two primary methods for forecasting volatility in this lesson-historical and implied. Students are provided with a historical dataset, from which they can estimate historical volatility of the stock returns. They can also use the dataset to study various statistical relations between the securities. In particular, two of the three securities behave independently of the others. Thus, students are able to analyze the dataset to form views of how the security prices are likely to evolve relative to each other.

Keywords

Volatility; Forecasting and Prediction; Stock Options; Investment Return; Price; Market Transactions; Mathematical Methods; Value

Citation

Coval, Joshua, and Erik Stafford. "Equity Options." Harvard Business School Background Note 208-118, January 2008.
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About The Authors

Joshua D. Coval

Finance
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Erik Stafford

Finance
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More from the Authors

    • March 2022
    • Faculty Research

    Exchanging Salary for Stock Options at a Startup

    By: Erik Stafford
    • January 2022
    • Review of Financial Studies

    Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting

    By: Erik Stafford
    • 2021
    • Faculty Research

    Limits to Bank Deposit Market Power

    By: Juliane Begenau and Erik Stafford
More from the Authors
  • Exchanging Salary for Stock Options at a Startup By: Erik Stafford
  • Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting By: Erik Stafford
  • Limits to Bank Deposit Market Power By: Juliane Begenau and Erik Stafford
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