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A Simulation Based Study Into The Hedging Of Exotic Options Via Both Static And Dynamic Hedging Strategies
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Book Synopsis A Simulation Based Study Into the Hedging of Exotic Options Via Both Static and Dynamic Hedging Strategies by : Roger Clarke
Download or read book A Simulation Based Study Into the Hedging of Exotic Options Via Both Static and Dynamic Hedging Strategies written by Roger Clarke and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Dynamic Hedging by : Nassim Nicholas Taleb
Download or read book Dynamic Hedging written by Nassim Nicholas Taleb and published by John Wiley & Sons. This book was released on 1997-01-14 with total page 536 pages. Available in PDF, EPUB and Kindle. Book excerpt: Destined to become a market classic, Dynamic Hedging is the only practical reference in exotic options hedgingand arbitrage for professional traders and money managers Watch the professionals. From central banks to brokerages to multinationals, institutional investors are flocking to a new generation of exotic and complex options contracts and derivatives. But the promise of ever larger profits also creates the potential for catastrophic trading losses. Now more than ever, the key to trading derivatives lies in implementing preventive risk management techniques that plan for and avoid these appalling downturns. Unlike other books that offer risk management for corporate treasurers, Dynamic Hedging targets the real-world needs of professional traders and money managers. Written by a leading options trader and derivatives risk advisor to global banks and exchanges, this book provides a practical, real-world methodology for monitoring and managing all the risks associated with portfolio management. Nassim Nicholas Taleb is the founder of Empirica Capital LLC, a hedge fund operator, and a fellow at the Courant Institute of Mathematical Sciences of New York University. He has held a variety of senior derivative trading positions in New York and London and worked as an independent floor trader in Chicago. Dr. Taleb was inducted in February 2001 in the Derivatives Strategy Hall of Fame. He received an MBA from the Wharton School and a Ph.D. from University Paris-Dauphine.
Book Synopsis Exotic Options and Hybrids by : Mohamed Bouzoubaa
Download or read book Exotic Options and Hybrids written by Mohamed Bouzoubaa and published by John Wiley & Sons. This book was released on 2010-03-30 with total page 405 pages. Available in PDF, EPUB and Kindle. Book excerpt: The recent financial crisis brought to light many of the misunderstandings and misuses of exotic derivatives. With market participants on both the buy and sell-side having been found guilty of not understanding the products they were dealing with, never before has there been a greater need for clarification and explanation. Exotic Options and Hybrids is a practical guide to structuring, pricing and hedging complex exotic options and hybrid derivatives that will serve readers through the recent crisis, the road to recovery, the next bull market and beyond. Written by experienced practitioners, it focuses on the three main parts of a derivative’s life: the structuring of a product, its pricing and its hedging. Divided into four parts, the book covers a multitude of structures, encompassing many of the most up-to-date and promising products from exotic equity derivatives and structured notes to hybrid derivatives and dynamic strategies. Based on a realistic setting from the heart of the business, inside a derivatives operation, the practical and intuitive discussions of these aspects make these exotic concepts truly accessible. Adoptions of real trades are examined in detail, and all of the numerous examples are carefully selected so as to highlight interesting and significant aspects of the business. The introduction of payoff structures is accompanied by scenario analysis, diagrams and lifelike sample term sheets. Readers learn how to spot where the risks lie to pave the way for sound valuation and hedging of such products. There are also questions and accompanying discussions dispersed in the text, each exploited to illustrate one or more concepts from the context in which they are set. The applications, the strengths and the limitations of various models are highlighted, in relevance to the products and their risks, rather than the model implementations. Models are de-mystified in separately dedicated sections, but their implications are alluded to throughout the book in an intuitive and non-mathematical manner. By discussing exotic options and hybrids in a practical, non-mathematical and highly intuitive setting, this book will blast through the misunderstanding of exotic derivatives, enabling practitioners to fully understand and correctly structure, price and hedge theses products effectively, and stand strong as the only book in its class to make these “exotic” concepts truly accessible.
Download or read book Dynamic Hedging written by Nassim Taleb and published by John Wiley & Sons. This book was released on 2002 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The only complete resource addressing derivative risk With the fully updated and expanded Dynamic Hedging, Revised Edition, readers will learn the proven methodologies for monitoring and managing all the risks associated with managing portfolios containing any nonlinear security. Presenting risk from the vantage point of the option market maker and arbitrage operator, this book remolds options theory to fit the practitioner′s environment. Replete with helpful tools, market anecdotes, and at-a-glance risk management rules, Dynamic Hedging, Revised Edition is a comprehensive reference to the complexities of the options market that provides clear explanations of all the various forms of risk. Nassim Nicholas Taleb (Greenwich, CT) is the founder of Empirica Capital LLC, a hedge fund operator, and a fellow at the Courant Institute of Mathematical Sciences of New York University. Dr. Taleb was inducted in February 2001 into the Derivatives Strategy Hall of Fame. He received an MBA from the Wharton School and a PhD from University Paris-Dauphine. Over the years, financial professionals around the world have looked to the Wiley Finance series and its wide array of bestselling books for the knowledge, insights, and techniques that are essential to success in financial markets. As the pace of change in financial markets and instruments quickens, Wiley Finance continues to respond. With critically acclaimed books by leading thinkers on value investing, risk management, asset allocation, and many other critical subjects, the Wiley Finance series provides the financial community with information they want. Written to provide professionals and individuals with the most current thinking from the best minds in the industry, it is no wonder that the Wiley Finance series is the first and last stop for financial professionals looking to increase their financial expertise.
Book Synopsis Dynamic Hedging of Vanilla and Exotic Options with Transaction Costs by : Peter J. Meindl
Download or read book Dynamic Hedging of Vanilla and Exotic Options with Transaction Costs written by Peter J. Meindl and published by . This book was released on 2005 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: The classical finance problem of dynamically hedging a short option in a discrete time environment with transaction costs has generally been approached through either a sub-optimal analytical solution with an instantaneous horizon or through the formulation of a long term horizon dynamic program whose solution is often computationally out of reach. We propose a new methodology to solve the dynamic hedging problem that combines the long term horizon of dynamic programming with computational feasibility, a major feature of the analytic methods. Our methodology has two key performance attributes: first, the ability to significantly reduce expected absolute hedging error on vanilla options where analytic solutions exist and second, the ability to be applied to exotics without analytic solutions where our methodology outperforms heuristic methods. We compare the results of our methodology, which utilizes tools from control theory and stochastic programming, to existing analytic delta hedging methodologies from Black and Scholes (1973) and Leland (1985) when we are shorting vanilla options. Simulation reveals our methodology can produce significantly lower expected absolute hedging error, in both a statistical and economic sense, than these analytic methods. When hedging exotic options where no analytic solution exists we can also apply our methodology. We dynamically hedge a 10 asset basket call option and show that our methodology significantly outperforms the expected absolute hedging error of heuristic hedging methodologies. We perform our tests on simulated underlying assets as well as on empirical Samp;P 500 data showing our methodology's superiority in each case. We believe this is an exciting new dynamic hedging methodology given this strong performance and applicability to both vanilla and exotic options.
Book Synopsis Optimal Static-Dynamic Hedges for Exotic Options under Convex Risk Measures by : Aytac Ilhan
Download or read book Optimal Static-Dynamic Hedges for Exotic Options under Convex Risk Measures written by Aytac Ilhan and published by . This book was released on 2008 with total page 25 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the problem of optimally hedging exotic derivatives positions using a combination of dynamic trading strategies in underlying stocks, and static positions in vanilla options when the performance is quantified by a convex risk measure. We establish conditions for the existence of an optimal static position for general convex risk measures, and then analyze in detail the case of expected shortfall with a power loss function. Here we find conditions for uniqueness of the static hedge. We illustrate the computational challenge of computing the market-adjusted risk measure in a simple diffusion model for an option on a non-traded asset.
Book Synopsis Static Hedging of Standard Options by : Peter Carr
Download or read book Static Hedging of Standard Options written by Peter Carr and published by . This book was released on 2017 with total page 61 pages. Available in PDF, EPUB and Kindle. Book excerpt: We consider the hedging of options when the price of the underlying asset is always exposed to the possibility of jumps of random size. Working in a single factor Markovian setting, we derive a new spanning relation between a given option and a continuum of shorter-term options written on the same asset. In this portfolio of shorter-term options, the portfolio weights do not vary with the underlying asset price or calendar time. We then implement this static relation using a finite set of shorter-term options and use Monte Carlo simulation to determine the hedging error thereby introduced. We compare this hedging error to that of a delta hedging strategy based on daily rebalancing in the underlying futures. The simulation results indicate that the two types of hedging strategies exhibit comparable performance in the classic Black-Scholes environment, but that our static hedge strongly outperforms delta hedging when the underlying asset price is governed by Merton (1976)'s jump-diffusion model. The conclusions are unchanged when we switch to ad hoc static and dynamic hedging practices necessitated by a lack of knowledge of the driving process. Further simulations indicate that the inferior performance of the delta hedge in the presence of jumps cannot be improved upon by increasing the rebalancing frequency. In contrast, the superior performance of the static hedging strategy can be further enhanced by using more strikes or by optimizing on the common maturity in the hedge portfolio.We also compare the hedging effectiveness of the two types of strategies using more than six years of data on Samp;P 500 index options. We find that in all cases considered, a static hedge using just five call options outperforms daily delta hedging with the underlying futures. The consistency of this result with our jump model simulations lends empirical support for the existence of jumps of random size in the movement of the Samp;P 500 index. We also find that the performance of our static hedge deteriorates moderately as we increase the gap between the maturity of the target call option and the common maturity of the call options in the hedge portfolio. We interpret this result as evidence of additional random factors such as stochastic volatility.
Book Synopsis Hedging Vanilla and Exotic Options by :
Download or read book Hedging Vanilla and Exotic Options written by and published by . This book was released on 1997 with total page 100 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Static Vs Dynamic Hedging written by and published by . This book was released on 1997 with total page 272 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Hedging Derivatives by : Thorsten Rheinlander
Download or read book Hedging Derivatives written by Thorsten Rheinlander and published by World Scientific. This book was released on 2011 with total page 244 pages. Available in PDF, EPUB and Kindle. Book excerpt: Valuation and hedging of financial derivatives are intrinsically linked concepts. Choosing appropriate hedging techniques depends on both the type of derivative and assumptions placed on the underlying stochastic process. This volume provides a systematic treatment of hedging in incomplete markets. Mean-variance hedging under the risk-neutral measure is applied in the framework of exponential L(r)vy processes and for derivatives written on defaultable assets. It is discussed how to complete markets based upon stochastic volatility models via trading in both stocks and vanilla options. Exponential utility indifference pricing is explored via a duality with entropy minimization. Backward stochastic differential equations offer an alternative approach and are moreover applied to study markets with trading constraints including basis risk. A range of optimal martingale measures are discussed including the entropy, Esscher and minimal martingale measures. Quasi-symmetry properties of stochastic processes are deployed in the semi-static hedging of barrier options. This book is directed towards both graduate students and researchers in mathematical finance, and will also provide an orientation to applied mathematicians, financial economists and practitioners wishing to explore recent progress in this field."
Book Synopsis Hedging Strategies and Minimal Variance Portfolios for European and Exotic Options in a Levy Market by : Wing Yip
Download or read book Hedging Strategies and Minimal Variance Portfolios for European and Exotic Options in a Levy Market written by Wing Yip and published by . This book was released on 2009 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents hedging strategies for European and exotic options in a Levy market. By applying Taylor's Theorem, dynamic hedging portfolios are constructed under different market assumptions, such as the existence of power jump assets or moment swaps. In the case of European options or baskets of European options, static hedging is implemented. It is shown that perfect hedging can be achieved. Delta and gamma hedging strategies are extended to higher moment hedging by investing in other traded derivatives depending on the same underlying asset. This development is of practical importance as such other derivatives might be readily available. Moment swaps or power jump assets are not typically liquidly traded. It is shown how minimal variance portfolios can be used to hedge the higher order terms in a Taylor expansion of the pricing function, investing only in a risk-free bank account, the underlying asset and potentially variance swaps. The numerical algorithms and performance of the hedging strategies are presented, showing the practical utility of the derived results.
Book Synopsis Static Hedging and Pricing of Exotic Options with Payoff Frames by : Justin Kirkby
Download or read book Static Hedging and Pricing of Exotic Options with Payoff Frames written by Justin Kirkby and published by . This book was released on 2018 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop a general framework for statically hedging European-style options with nonstandard terminal payoffs which can be applied to mixed static-dynamic and semi-static hedges for many path dependent exotic options. This framework provides a new model-free method of derivatives pricing that builds on recent advances in transform-based numerical approaches. The goal is achieved by separating the hedging and pricing problems to obtain model-free replicating strategies. Once prices have been obtained for a set of basis payoffs, the pricing and hedging of financial securities with arbitrary payoffs functions is accomplished by computing a set of "hedge coefficients" for that security. This method is particularly well suited for pricing baskets of options simultaneously, and is robust to discontinuities of payoffs. In addition, the method enables a systematic comparison of the value of a payoff (or portfolio) across a set of competing model specifications with implications for security design.
Book Synopsis Hedging with Commodity Futures by : Su Dai
Download or read book Hedging with Commodity Futures written by Su Dai and published by GRIN Verlag. This book was released on 2013-11-12 with total page 80 pages. Available in PDF, EPUB and Kindle. Book excerpt: Master's Thesis from the year 2013 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1,7, University of Mannheim, language: English, abstract: The commodity futures contract is an agreement to deliver a specific amount of commodity at a future time . There are usually choices of deliverable grades, delivery locations and delivery dates. Hedging belongs to one of the fundamental functions of futures market. Futures can be used to help producers and buyers protect themselves from price risk arising from many factors. For instance, in crude oil commodities, price risk occurs due to disrupted oil supply as a consequence of political issues, increasing of demand in emerging markets, turnaround in energy policy from the fossil fuel to the solar and efficient energy, etc. By hedging with futures, producers and users can set the prices they will receive or pay within a fixed range. A hedger takes a short position if he/she sells futures contracts while owning the underlying commodity to be delivered; a long position if he/she purchases futures contracts. The commonly known basis is defined as the difference between the futures and spot prices, which is mostly time-varying and mean-reverting. Due to such basis risk, a naïve hedging (equal and opposite) is unlikely to be effective. With the popularity of commodity futures, how to determine and implement the optimal hedging strategy has become an important issue in the field of risk management. Hedging strategies have been intensively studied since the 1960s. One of the most popular approaches to hedging is to quantify risk as variance, known as minimum-variance (MV) hedging. This hedging strategy is based on Markowitz portfolio theory, resting on the result that “a weighted portfolio of two assets will have a variance lower than the weighted average variance of the two individual assets, as long as the two assets are not perfectly and positively correlated.” MV strategy is quite well accepted, however, it ignores the expected return of the hedged portfolio and the risk preference of investors. Other hedging models with different objective functions have been studied intensively in hedging literature. Due to the conceptual simplicity, the value at risk (VaR) and conditional value at risk (C)VaR have been adopted as the hedging risk objective function. [...]
Book Synopsis Pricing, Hedging, and Trading Exotic Options by : Israel Nelken
Download or read book Pricing, Hedging, and Trading Exotic Options written by Israel Nelken and published by Irwin Professional Publishing. This book was released on 2000 with total page 328 pages. Available in PDF, EPUB and Kindle. Book excerpt: "In describing the major types of exotic options Pricing, Hedging, and Trading Exotic Options also reveals their key applications.
Book Synopsis Static Hedging of Timing Risk by : Jean-Francois Picron
Download or read book Static Hedging of Timing Risk written by Jean-Francois Picron and published by . This book was released on 1999 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Many exotic options involve a payoff that occurs at the first time the stock price crosses a constant barrier. Although the amount to be paid is known, the time at which it is paid is not. This article shows how a static position in European options can be used to hedge against this timing risk. The simulation results show that this approach outperforms dynamic hedging with the underlying. The authors show how these results can be used to price any barrier option.
Book Synopsis Model-free Hedging by : Pierre Henry-Labordere
Download or read book Model-free Hedging written by Pierre Henry-Labordere and published by CRC Press. This book was released on 2017-05-25 with total page 190 pages. Available in PDF, EPUB and Kindle. Book excerpt: Model-free Hedging: A Martingale Optimal Transport Viewpoint focuses on the computation of model-independent bounds for exotic options consistent with market prices of liquid instruments such as Vanilla options. The author gives an overview of Martingale Optimal Transport, highlighting the differences between the optimal transport and its martingale counterpart. This topic is then discussed in the context of mathematical finance.
Book Synopsis Sequential Static-Dynamic Hedging for Long-Term Derivatives by : Tim Leung
Download or read book Sequential Static-Dynamic Hedging for Long-Term Derivatives written by Tim Leung and published by . This book was released on 2014 with total page 8 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents a new methodology for hedging long-term financial derivatives written on an illiquid asset. The proposed hedging strategy combines dynamic trading of a correlated liquid asset (e.g. the market index) and static positions in market-traded options such as European puts and calls. Moreover, since most market-traded options are relatively short-term, it is necessary to conduct the static hedge sequentially over time till the long-term derivative expires. This sequential static-dynamic hedging strategy leads to the study of a stochastic control problem and the associated Hamilton-Jacobi-Bellman PDEs and variational inequalities. A series of transformations allow us to simplify the problem and compute the optimal hedging strategy.
