Risk of Options — Impact of Volatility Parameter

A derivative instrument is a financial instrument whose value depends on the value on the underlying index, for example on the price of another financial instrument (e.g. currency, stock). Derivative instruments gained a lot of attention of financial theoreticians and practitioners in the last decade. The main reason is the increasing risk both on the financial markets and in the whole economy. On the one hand, the derivative instruments proved to be very useful instruments in risk management. This refers to the following types of risk: market risk (interest rate risk, exchange rate risk, stock price risk, commodity price risk); credit risk; enterprise-wide risk; weather risk; insurance (catastrophe) risk.