Can anyone explain this equation to me ? Particularly, why we multiply the strike by 2 in the denominator? Thanks!
Also, why do we take the natural log of the daily price relatives to determine realized variance?
Realized variance is calculated by taking the natural log of the daily price relatives, the closing price on day t , divided by the closing price on day t − 1 :
Ri = ln(Pt / Pt–1)
That gives you the continuous rate rather than the effective annual rate.
It’s a calculus thing.
Got me.
It’s their convention, but I don’t know the reason for it.
I wouldn’t worry about it; know the formula and you’ll be fine.