New Zealand whole milk powder options

Abstract

This paper studies the New Zealand (NZ) dairy derivatives, specifically, whole milk powder (WMP) options, which have been the most actively traded options in NZ since their inception in November 2011. Using the methodology of Zhang and Xiang, the dynamics of the implied volatility smirk of WMP options is documented. Overall, the level, slope and curvature were found to be 0.2625, −0.0194 and 0.0756, respectively. Modifying the CBOE VIX methodology, the NZ Dairy Volatility Index is created; this exhibits a downward trend and is the second-best predictor of WMP returns, after curvature, in the latest subsampleafter 26 June 2017.

Term spreads of implied volatility smirk and variance risk premium

“…This method could be used to quantify IV curves and obtains risk‐neutral moments in a small sample. Compared with the method of Bakshi and Kapadia (2003), this method builds an intuitive relationship between IV curve shape and risk‐neutral moments and is widely used by researchers to obtain the level, slope, and curvature factors (Aschakulporn & Zhang, 2021; Gehricke & Zhang, 2020; Guo et al, 2021; Jia et al, 2021; J. Li et al, 2019). We calculate the Zhang and Xiang (2008) IV factors for different maturity option contracts and then use linear interpolation and extrapolation to create time series of constant maturity IV factors.…”

“…Second, we extend the study of the IV term structure. Previously, the IV term structure has been used to obtain IV factors and forecast returns, including equity returns (Guo et al, 2021; Xing et al, 2010; Yan, 2011; Yue et al, 2021), commodity returns (Aschakulporn & Zhang, 2021; Jia et al, 2021), and futures returns (Yoon et al, 2022). However, our paper explores the usefulness of IV curve factors and their term spreads to predict the VRP, which has received less attention to date.…”

“…This method could be used to quantify IV curves and obtains risk-neutral moments in a small sample. Compared with the method of , this method builds an intuitive relationship between IV curve shape and risk-neutral moments and is widely used by researchers to obtain the level, slope, and curvature factors (Aschakulporn & Zhang, 2021;Gehricke & Zhang, 2020;Guo et al, 2021;Jia et al, 2021;J. Li et al, 2019).…”

Implied volatility smirk in the Australian dollar market

“…This smirk shape is now well accepted in the literature for US equity options; however, Guo et al (2020) show that since 2005, the smirk shape found on average seems to be driven mainly by the GFC period and that outside of this time the IV curve of SPY options represents a linear downward sloping line with very minimal curvature. There is now a vast literature examining the IV curves of international equity options (Pe ña et al, 1999;Tanha and Dempsey, 2015;Shiu et al, 2010;Li et al, 2019;Yue et al, 2020), commodity options (Soini and Lorentzen, 2019;Jia et al, 2021;Aschakulporn and Zhang, 2020) and volatility derivative options (Gehricke and Zhang, 2020). A vast strand of literature exists that tries to explain the driving factors of the shape of the equity IV curves (Pan, 2002;Hentschel, 2003;Bollen and Whaley, 2004;Han, 2007;Garleanu et al, 2009;Xing et al, 2010;DeMiguel et al, 2013;An et al, 2014;Fajardo, 2017).…”