financial information management gamma hedging wilhelm's warriors no hedgetation the gobs of...
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Gamma Hedging
Wilhelm's Warriors
No Hedgetation
The Gobs of Money Machine
The Ira Harris Experience
Critical Thinking Good job overall Easy meter
Today office hours: 4-6
The Hedge Tournament Questions?
Price generationSP500
beta + noise
STOCKS Bids and
Asks
OPTIONSBids and
Asks
B.S.+ noise
real g,real volatility
real initial pricesreal beta,real volatility
NOT random!
Confidential Peer EvaluationNAME: NAME: NAM
E:
OVERALL CONTRIBUTIONTO TEAM SUCCESS
TEAM WORK
QUALITY OF WORKAMOUNT OF WORK
KNOWLEDGEOF THE PROJECT AREAIDEAS CONTRIBUTED
TO THE PROJECTORGANIZATION OF TEAM
WORK (ADMIN.)
TEAM RAPPORT
LEADERSHIPENTHUSIASM,
ATTITUDE, INITIATIVERESPECT FOR OTHERS
DEPENDABILITY, GOOD TEAM PLAYER
MEETING ATTENDANCE, PUNCTUALITY
May affect your grade
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t HedgingGamma, Vega, Theta & Rho
Gamma Delta (D) measures the change in portfolio value
as the underlier’s price S changes (~speed). Gamma (G) measures the rate of change in
portfolio value as S changes (~acceleration).
Meaning of Gamma If Gamma is small (abs.), small changes in
S will not affect much Delta (and your portfolio value) ,sothere is less need to take immediate rebalancing action.
If Gamma is large, small changes in S will affect Delta (and your portfolio value) significantly, sothere is a stronger need to take immediate rebalancing action.
Using Gamma During small periods of time t2-t1
D Portfolio = ½ * * G (S2-S1)2
Example:If you do not rebalance and the underlier price drops from $52 to $50, the change of value in a Delta-Neutral Portfolio is approximately
= ½ * * G (S2-S1)2
= 0.5 * (-10,000) * (52-50)2 = -$20,000
~
How to Calculate Gamma Gamma = N’(d1)
S sÖ t N’(d1) = e –(d1)
2/2
Ö (2 p)
d1 as in Black Scholes
Strike Stock price S
Gamma
Gamma-Neutral Portfolio More stable than a delta neutral-only. Cannot use the stock to reach Gamma neutrality
because the stock has Gamma = 0
1) Gportfolio <> 0 2) Gportfolio + Gx qtyx = 0
3) qtyx = -Gportfolio / Gx
Warning: Acquiring qtyx will disturb Delta neutrality. You will need to rebalance.
Delta Gamma DeltaIt’s a strategy, not a sorority.1. Find out what to acquire to achieve
Delta neutrality.2. Find out what to acquire to achieve
Gamma neutrality.3. Find out what to acquire to re-achieve
Delta neutrality. Stock is ideal because it will not affect Gamma.
More Dark Horses Simultaneous Delta Gamma Conditional Gamma
Extreme transaction costs minimization
Come and see me – not on the last day!
Theta, Vega, and RhoConceptually similar to Delta Theta = change in portfolio value when
time changes Vega = change in portfolio value when
the volatility changes Rho = change in portfolio value when
the rate of interest changes
Fin
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t WINITWhat Is New
In Technology?
Fin
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t HomeworkSpartan Trader
Your Opinion Matters Name A couple of things that you are learning
from the class Things that you like/that can be
improved Is the class getting you to think
on your own? Concerns about the HT