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Andy Constan: The Bond Market Will Take The Stock Market Down With It
Forward Guidance
Understanding Skew in Options Market Pricing
Options market pricing shows put skew in the equity market due to higher implied volatility for out of the money puts, indicating a market tendency to drop quickly and rise gradually. In contrast to equity markets, the interest rate world displays different skews, with expensive options indicating market expectations. By utilizing option prices, an implied distribution can be calculated which accounts for skew, showing a non-normal distribution of future prices and enabling a more accurate estimation of the probabilities of rate cuts and hikes.
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