Posted by i3gambler > 1 month ago | Report Abuse
Investformilkmoney
1) They calculate the Historical Volatility (HV), let say it is 20%,
2) Apply a factor of, say for example 1.25, it is 20%*1.25=25%,
3) This 25% become Implied Volatility (IV)
4) Input 25% to Fair Value Calculator, and let say they get the Fair Value is 60 sen,
5) Then they set the ratio as 4, the issue price will be 60 sen / 4 = 15 sen.
6) After listing, they set market making, Buy at 15.0 sen and Sell at 15.5 sen,
7) The Spread 0.5 sen, that is 3.3%, and is their profit,
8) If the price go down to 10 sen, then 0.5 / 10, that is 5%, higher profit,
9) If the price go up, they can set buy / sell spread to 1.0 sen to maintain the profit margin,
10) But the problem is when the price go up further, let say to 50 sen,
11) They can set market making buy 50.0 and sell 52 sen,
12) But I can jump Q to buy 50.5 sen , or the person who have that CW can jump Q to sell at 51.5,
13) Then Issuer can not maintain their profit.