We now know from our previous blog post how Options are priced using the Black-Scholes model (or more complex iterations).

Options are financial derivatives that give the holder the right (but not the obligation) to buy or sell an underlying asset at a predetermined price (strike price) within a specified time period. Options are often used for various purposes, including speculation, hedging, and managing risk. They are actively traded in options markets, which are part of the broader derivatives markets.

As an interest rate curve (term structure) gets created, traders will be able to take a view of the curve shape. Yield curve dynamics represent a crucial macro variable because they inform us of today’s borrowing conditions and the market's future expectations for growth and inflation. Some examples:

Crypto is still a maturing class with liquidity spread across various platforms and products. This will create constant arbitrage opportunities.

Interest rate arbitrage refers to a financial strategy where an investor takes advantage of interest rate differentials between two or more financial instruments or markets to make a profit with minimal risk. This type of arbitrage capitalizes on discrepancies in interest rates, which can arise due to various factors such as market inefficiencies, changes in economic conditions, or differences in credit risk.

The VIX, or the CBOE Volatility Index, is a popular measure of market expectations for future volatility. It is often referred to as the "fear gauge" because it tends to rise during periods of increased market uncertainty or fear and fall during more stable market conditions. The VIX is designed to reflect investors' perceptions of the expected volatility over the next 30 days in the U.S. stock market.

Implied Volatility (IV): This is a market-derived estimate of future volatility embedded in the current prices of options. It reflects the market's expectations for future price fluctuations of the underlying asset.

Futures and forwards are financial derivatives that derive their value from an underlying asset. They are contracts between two parties to buy or sell the asset at a predetermined price on a specified future date. While they share similarities, there are key differences between futures and forwards:

As interest rates rise, bond prices typically fall, and as rates fall, bond prices rise. Duration helps investors quantify this relationship. Bond duration is a measure of the sensitivity of a bond's price to changes in interest rates. It provides an estimate of the potential impact of interest rate fluctuations on the value of a fixed-income investment.