Optimal Dynamic Hedging Of Multi Asset Options

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Optimal Dynamic Hedging of Multi-Asset Options

Author : Andrea Petrelli
Publisher :
ISBN 13 :
Total Pages : 50 pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis Optimal Dynamic Hedging of Multi-Asset Options by : Andrea Petrelli

Download or read book Optimal Dynamic Hedging of Multi-Asset Options written by Andrea Petrelli and published by . This book was released on 2010 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: Hedging and valuing multi-asset options are analyzed using the Optimal Hedge Monte-Carlo method. The average cost of hedging and the residual risks are related to the stochastic description of the underlying assets, their dependence structure, and to the option contract details. A long position in a basket of the underlying assets mixed in proportions to their hedge ratios is employed to assess a bounding rate of return on risk-capital (i.e., a hurdle rate) for the option trader-hedger. That hurdle rate is employed to assess bounding values of multi-asset derivative positions while accounting for hedging costs and the inevitable hedge slippage that determines the derivative trader's risk-capital. Sample calculations are provided for two-asset options where the option trader-hedger is long correlation and short correlation, such as best-of and worst-of options. The differences in hedging strategies between such options and junior and senior basket-put tranches are delineated. The dual roles of fat-tails for individual assets and uncertainty of realized correlation in controlling the irreducible hedging errors are also described.

Dynamic Hedging

Author : Nassim Nicholas Taleb
Publisher : John Wiley & Sons
ISBN 13 : 9780471152804
Total Pages : 536 pages
Book Rating : 4.1/5 (528 download)

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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.

Optimal Dynamic Hedging of Equity Options

Author : Andrea Petrelli
Publisher :
ISBN 13 :
Total Pages : 85 pages
Book Rating : 4.:/5 (13 download)

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Book Synopsis Optimal Dynamic Hedging of Equity Options by : Andrea Petrelli

Download or read book Optimal Dynamic Hedging of Equity Options written by Andrea Petrelli and published by . This book was released on 2019 with total page 85 pages. Available in PDF, EPUB and Kindle. Book excerpt: Attempted dynamic replication based valuation of equity options is analyzed using the Optimal Hedge Monte-Carlo (OHMC) method. Detailed here are (1) the option hedging strategy and its costs; (2) irreducible hedging errors associated with realistically fat-tailed & asymmetric return distributions; (3) impact of transaction costs on hedging costs and hedge-performance; (4) impact of conditioning hedging strategy on realized volatility. The asset returns are addressed by the General Auto-Regressive Asset Model (GARAM, Wang et al [2009]) that employs two stochastic processes to model the return magnitude and sign and results in a realistic term-structure of the fat-tails, dynamic-asymmetry, and clustering of volatility. The relationship between the option price and ensuing return versus risk characteristics of the option seller-hedger & buyer-hedger are described for different conditioning regimes in GARAM. A hurdle return is employed to assess bounding values of options that reflect hedging costs, the inevitable hedge slippage, & transaction costs. The hurdle return can also be used to make relative-value inferences (e.g., by comparing to the return-risk profile of a delta-1 position in the underlying) or even fit option values to market while still informing the trader about residual risk and its asymmetry between option buyer-hedger and seller-hedger. Tail-risk measures are shown to diminish by conditioning the hedging strategy and valuation on realized volatility. The role of fat-tails and uncertainty of realized volatility and its temporal persistence in controlling the optimal hedge ratios, irreducible hedging errors, and option-trading risk premiums are delineated.

Optimal Dynamic Hedging and Hedger's Asset Pricing of a State Contingent Asset

Author : Sung Kook Kim
Publisher :
ISBN 13 :
Total Pages : 158 pages
Book Rating : 4.:/5 (386 download)

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Book Synopsis Optimal Dynamic Hedging and Hedger's Asset Pricing of a State Contingent Asset by : Sung Kook Kim

Download or read book Optimal Dynamic Hedging and Hedger's Asset Pricing of a State Contingent Asset written by Sung Kook Kim and published by . This book was released on 1992 with total page 158 pages. Available in PDF, EPUB and Kindle. Book excerpt:

An Application of Optimal Dynamic Hedging in International Asset Allocation

Author : Shohreh Valiani
Publisher :
ISBN 13 :
Total Pages : 24 pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis An Application of Optimal Dynamic Hedging in International Asset Allocation by : Shohreh Valiani

Download or read book An Application of Optimal Dynamic Hedging in International Asset Allocation written by Shohreh Valiani and published by . This book was released on 2004 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt: The portfolio decision problem for global investments involves a joint choice over the financial assets and currencies. This paper investigates currency risk hedging when the volatilities and the correlations of forward currency contracts with the financial assets, are all time-varying. In order to capture the dynamic structure of the volatilities and correlations, a multivariate GARCH model with time-varying correlation, has been adopted. The dynamic optimization is estimated for different international portfolios over the time period of January 1985 till December 2002. The optimized dynamic hedge strategy can capture reasonably the currency fluctuations and significantly reduce the currency risk exposures and therefore enhance the risk-adjusted performance of the international portfolios. Our study deals with a German investor investing in the equity markets of United Kingdom, Japan and U.S.A.

Dynamic Asset Allocation with Forwards and Futures

Author : Abraham Lioui
Publisher : Springer Science & Business Media
ISBN 13 : 9780387241074
Total Pages : 290 pages
Book Rating : 4.2/5 (41 download)

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Book Synopsis Dynamic Asset Allocation with Forwards and Futures by : Abraham Lioui

Download or read book Dynamic Asset Allocation with Forwards and Futures written by Abraham Lioui and published by Springer Science & Business Media. This book was released on 2005-03-30 with total page 290 pages. Available in PDF, EPUB and Kindle. Book excerpt: This is an advanced text on the theory of forward and futures markets which aims at providing readers with a comprehensive knowledge of how prices are established and evolve over time, what optimal strategies one can expect from the participants, what characterizes such markets and what major theoretical and practical differences distinguish futures from forward contracts. It should be of interest to students (majoring in finance with quantitative skills) academics (both theoreticians and empiricists), practitioners, and regulators.

Optimal Dynamic Hedging Using Futures Under a Borrowing Constraint

Author : Akash Deep
Publisher :
ISBN 13 :
Total Pages : 40 pages
Book Rating : 4.3/5 ( download)

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Book Synopsis Optimal Dynamic Hedging Using Futures Under a Borrowing Constraint by : Akash Deep

Download or read book Optimal Dynamic Hedging Using Futures Under a Borrowing Constraint written by Akash Deep and published by . This book was released on 2002 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Practical Methods of Financial Engineering and Risk Management

Author : Rupak Chatterjee
Publisher : Apress
ISBN 13 : 143026134X
Total Pages : 379 pages
Book Rating : 4.4/5 (32 download)

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Book Synopsis Practical Methods of Financial Engineering and Risk Management by : Rupak Chatterjee

Download or read book Practical Methods of Financial Engineering and Risk Management written by Rupak Chatterjee and published by Apress. This book was released on 2014-09-26 with total page 379 pages. Available in PDF, EPUB and Kindle. Book excerpt: Risk control, capital allocation, and realistic derivative pricing and hedging are critical concerns for major financial institutions and individual traders alike. Events from the collapse of Lehman Brothers to the Greek sovereign debt crisis demonstrate the urgent and abiding need for statistical tools adequate to measure and anticipate the amplitude of potential swings in the financial markets—from ordinary stock price and interest rate moves, to defaults, to those increasingly frequent "rare events" fashionably called black swan events. Yet many on Wall Street continue to rely on standard models based on artificially simplified assumptions that can lead to systematic (and sometimes catastrophic) underestimation of real risks. In Practical Methods of Financial Engineering and Risk Management, Dr. Rupak Chatterjee— former director of the multi-asset quantitative research group at Citi—introduces finance professionals and advanced students to the latest concepts, tools, valuation techniques, and analytic measures being deployed by the more discerning and responsive Wall Street practitioners, on all operational scales from day trading to institutional strategy, to model and analyze more faithfully the real behavior and risk exposure of financial markets in the cold light of the post-2008 realities. Until one masters this modern skill set, one cannot allocate risk capital properly, price and hedge derivative securities realistically, or risk-manage positions from the multiple perspectives of market risk, credit risk, counterparty risk, and systemic risk. The book assumes a working knowledge of calculus, statistics, and Excel, but it teaches techniques from statistical analysis, probability, and stochastic processes sufficient to enable the reader to calibrate probability distributions and create the simulations that are used on Wall Street to valuate various financial instruments correctly, model the risk dimensions of trading strategies, and perform the numerically intensive analysis of risk measures required by various regulatory agencies.

Optimal Dynamic Hedging

Author : Sanford J. Grossman
Publisher :
ISBN 13 :
Total Pages : 38 pages
Book Rating : 4.:/5 (27 download)

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Book Synopsis Optimal Dynamic Hedging by : Sanford J. Grossman

Download or read book Optimal Dynamic Hedging written by Sanford J. Grossman and published by . This book was released on 1988 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Sequential Static-Dynamic Hedging for Long-Term Derivatives

Author : Tim Leung
Publisher :
ISBN 13 :
Total Pages : 8 pages
Book Rating : 4.:/5 (13 download)

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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.

Performance of Dynamic Hedging Strategies

Author : Aleš Černý
Publisher :
ISBN 13 :
Total Pages : 27 pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis Performance of Dynamic Hedging Strategies by : Aleš Černý

Download or read book Performance of Dynamic Hedging Strategies written by Aleš Černý and published by . This book was released on 2020 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: Suppose an investment bank consists of two desks trading in equity and equity options, and it operates in a market where equity returns are leptokurtic. It is well known (Schweizer 1994) that the optimal mean-variance trading strategy for the bank as a whole is path-dependent. This paper examines quasi-optimal strategies that preserve the path-independent nature of Black - Scholes option hedging coefficients without excessively compromising bank's overall efficiency. More generally, I investigate the issue of risk-adjusted performance measurement, attribution and investment-hedging separation between two desks trading in derivative and the underlying asset, respectively.lt;brgt;lt;brgt;It is shown that both the optimal and quasi-optimal hedging strategies require close coordination between the equity and option desks, insofar as the optimal volume of option sales depends crucially on the relative performance of the two desks. Closed-form expressions for the Sharpe ratio and Certainty Equivalent Growth Rate as well as numerical results for a model calibrated to historical FTSE 100 equity index returns are given.

Optimal Hedging of the Currency Exchange Risk Exposure of Dynamically Balanced Strategic Asset Allocations

Author : Nikolaus Hautsch
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis Optimal Hedging of the Currency Exchange Risk Exposure of Dynamically Balanced Strategic Asset Allocations by : Nikolaus Hautsch

Download or read book Optimal Hedging of the Currency Exchange Risk Exposure of Dynamically Balanced Strategic Asset Allocations written by Nikolaus Hautsch and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents theoretical and empirical results on the magnitude of optimal hedge ratios for a dynamically balanced strategic asset allocation with multiple currencies. Optimality refers to a mean-variance objective function with a time-varying risk-aversion parameter. A data driven choice of this parameter is proposed, which is suggested by a Sharpe ratio maximization criterion and renders the vector of optimal hedge ratios scale invariant. Empirical results are given for an EMU based investor with USD, GBP and JPY assets and an US based investor with assets in EUR, GBP and JPY. Since the vector of optimal hedge ratios depends on the conditional variance-covariance matrix of the involved exchange rate return time series, multivariate GARCH models are estimated. In particular, ML estimation of the DCC-GARCH model is performed, which remains computationally attractive in large dimensional cases. A fixed-mix rebalancing investment rule is applied in order to maintain the strategic asset allocation over time. Finally, hedging strategies for subsidiary companies are investigated, which account for the hedging interests of their mother company.

Option Volatility and Pricing: Advanced Trading Strategies and Techniques, 2nd Edition

Author : Sheldon Natenberg
Publisher : McGraw-Hill Education
ISBN 13 : 9780071818773
Total Pages : 0 pages
Book Rating : 4.8/5 (187 download)

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Book Synopsis Option Volatility and Pricing: Advanced Trading Strategies and Techniques, 2nd Edition by : Sheldon Natenberg

Download or read book Option Volatility and Pricing: Advanced Trading Strategies and Techniques, 2nd Edition written by Sheldon Natenberg and published by McGraw-Hill Education. This book was released on 2014-11-21 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: WHAT EVERY OPTION TRADER NEEDS TO KNOW. THE ONE BOOK EVERY TRADER SHOULD OWN. The bestselling Option Volatility & Pricing has made Sheldon Natenberg a widely recognized authority in the option industry. At firms around the world, the text is often the first book that new professional traders are given to learn the trading strategies and risk management techniques required for success in option markets. Now, in this revised, updated, and expanded second edition, this thirty-year trading professional presents the most comprehensive guide to advanced trading strategies and techniques now in print. Covering a wide range of topics as diverse and exciting as the market itself, this text enables both new and experienced traders to delve in detail into the many aspects of option markets, including: The foundations of option theory Dynamic hedging Volatility and directional trading strategies Risk analysis Position management Stock index futures and options Volatility contracts Clear, concise, and comprehensive, the second edition of Option Volatility & Pricing is sure to be an important addition to every option trader's library--as invaluable as Natenberg's acclaimed seminars at the world's largest derivatives exchanges and trading firms. You'll learn how professional option traders approach the market, including the trading strategies and risk management techniques necessary for success. You'll gain a fuller understanding of how theoretical pricing models work. And, best of all, you'll learn how to apply the principles of option evaluation to create strategies that, given a trader's assessment of market conditions and trends, have the greatest chance of success. Option trading is both a science and an art. This book shows how to apply both to maximum effect.

Optimal Dynamic Hedging in Incomplete Futures Markets

Author : Abraham Lioui
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis Optimal Dynamic Hedging in Incomplete Futures Markets by : Abraham Lioui

Download or read book Optimal Dynamic Hedging in Incomplete Futures Markets written by Abraham Lioui and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper derives optimal hedging demands for futures contracts from an investor who cannot freely trade his portfolio of primitive assets in the context of either a CARA or a logarithmic utility function. Existing futures contracts are not numerous enough to complete the market. In addition, in the case of CARA, the nonnegativity constraint on wealth is binding and the optimal hedging demands are not identical to those that would be derived if the constraint were ignored. Fictitiously completing the market, we can characterize the optimal hedging demands for futures contracts. Closed-form solutions exist in the logarithmic case, but not in the CARA case, since then a put (insurance) written on his wealth is implicitly bought by the investor. Although solutions are formally similar to those which obtain under complete markets, incompleteness leads in fact to second best optima.

An Analysis of Multi-asset Options

Author : Adam Ockman
Publisher :
ISBN 13 :
Total Pages : 33 pages
Book Rating : 4.:/5 (244 download)

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Book Synopsis An Analysis of Multi-asset Options by : Adam Ockman

Download or read book An Analysis of Multi-asset Options written by Adam Ockman and published by . This book was released on 2002 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Dynamic hedging in incomplete markets : a simple solution

Author : Suleyman Başak
Publisher :
ISBN 13 :
Total Pages : 47 pages
Book Rating : 4.:/5 (741 download)

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Book Synopsis Dynamic hedging in incomplete markets : a simple solution by : Suleyman Başak

Download or read book Dynamic hedging in incomplete markets : a simple solution written by Suleyman Başak and published by . This book was released on 2011 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Pricing and Hedging Financial Derivatives

Author : Leonardo Marroni
Publisher : John Wiley & Sons
ISBN 13 : 1119954584
Total Pages : 277 pages
Book Rating : 4.1/5 (199 download)

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Book Synopsis Pricing and Hedging Financial Derivatives by : Leonardo Marroni

Download or read book Pricing and Hedging Financial Derivatives written by Leonardo Marroni and published by John Wiley & Sons. This book was released on 2014-06-19 with total page 277 pages. Available in PDF, EPUB and Kindle. Book excerpt: The only guide focusing entirely on practical approaches to pricing and hedging derivatives One valuable lesson of the financial crisis was that derivatives and risk practitioners don't really understand the products they're dealing with. Written by a practitioner for practitioners, this book delivers the kind of knowledge and skills traders and finance professionals need to fully understand derivatives and price and hedge them effectively. Most derivatives books are written by academics and are long on theory and short on the day-to-day realities of derivatives trading. Of the few practical guides available, very few of those cover pricing and hedging—two critical topics for traders. What matters to practitioners is what happens on the trading floor—information only seasoned practitioners such as authors Marroni and Perdomo can impart. Lays out proven derivatives pricing and hedging strategies and techniques for equities, FX, fixed income and commodities, as well as multi-assets and cross-assets Provides expert guidance on the development of structured products, supplemented with a range of practical examples Packed with real-life examples covering everything from option payout with delta hedging, to Monte Carlo procedures to common structured products payoffs The Companion Website features all of the examples from the book in Excel complete with source code