One is an index to measure expected risk, which is called expected risk rate (or expected rate of return); The second is to measure the deviation around the expected risk value.
1, calculation of expected risk rate
Looking at the relationship between risk and price fluctuation, there may be changes in two directions, namely, up or down. Therefore, the degree of two-way fluctuation is the most important and simple index to judge the degree of contract risk. The expected risk rate is generally calculated based on previous statistical data.
Let the highest pRice and lowest price of a contract's annual (or monthly) transaction be S 1, So respectively, and its annual (or monthly) risk rate (also called spread ratio) be ri, that is, ri = [2 (s1-so)/(s1+so)].
Investors can also calculate the possibility or probability of each risk result through statistical data, so as to calculate the expected risk rate of stock index futures contract trading. There are two ways to calculate the expected risk rate.
(1) If the probability of each risk is equal, then the expected risk rate is equal to the sum of all risk rates divided by the number of risks.
(2) If the probabilities of various risks in contract transactions are known, the expected risk rate is equal to the product of the sum of all risk rates and their occurrence probabilities, regardless of whether the probabilities of the results are equal.
The calculation result of expected risk rate provides a fair index for measuring the risk of futures trading. The spread ratio is used to measure the risk of futures investment, which emphasizes that risk is the fluctuation degree of futures contract price. Because its price can fluctuate up and down, the other side of the risk is profit.
2. Calculation of deviation
Under the uncertainty, it is not enough to measure the risk of futures trading and make investment decisions only with the expected risk rate. Investors must also consider the risk that the actual situation deviates from the expected situation, that is, the risk that the expected return cannot be realized. The actual risk rate may be higher, lower or equal to the expected risk rate. The phenomenon that the actual risk rate is higher or lower than the expected risk rate is called fluctuation around the expected risk rate. The greater the degree of this fluctuation, the greater the risk for investors. Therefore, the fluctuation degree of the actual risk rate of the contract around the expected risk rate actually becomes the second risk indicator to measure futures trading.
Generally speaking, variance or standard deviation is used to measure the degree of this fluctuation. The meaning of variance and standard deviation is essentially the same. If the risk variance or standard deviation of an investment is larger, it means that the actual risk rate fluctuates around the expected risk rate, and the risk of investors making investment decisions according to the expected risk rate is greater.
Because it is difficult to obtain accurate actual risk rate, in practice, short-term spread ratio (such as weekly price change ratio or three-day price change ratio) is usually used instead of actual risk ratio.