MSCI published this report recently: http://www.mscibarra.com/resources/pdfs/research/Portfolio_BCP_Nov_2009.pdf which basically looks at various methods of mitigating extreme event risk for equity portfolios.

One method they test is to buy options when their indicators suggest downside risk.  On pg 13 they mention they they use Black-Scholes to estimate the price of these options, using the VIX index as volatility and US 3m T-bills for the risk free rate

I was wondering if anyone had any experience of how accurate this assumption is likely to be in practice, and whether in practice the price would be likely to be greater or less than this estimate

Peter Mennie



      
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