Hedging Higher order Greeks – Lesson Three We are now ready to solve the Gamma Vega hedging optimization model in Excel created in our first two lessons earlier. For a quick review see: Lesson One – Introduction Lesson Two – Setting up the Solver Model When we press the solve button on the Excel Solver add-in what does the [...]
Hedging Higher Order Greeks using Excel – Building the Solver model Our first attempt to hedge higher order Greeks is a simple illustrative scenario with a single option contract. (read: don’t try this back at your desk without supervision if you value your sales and trading job). We start off where we stopped in lesson one on [...]
Hedging Higher Order Greeks Since a spot, forward or future position is linear in its pay off it has no second order derivative. Options on the other hand are non-linear (asymmetric payoffs). While we can get away with hedging Delta with a linear position because Delta is a linear approximation (a tangent used to estimate the [...]
April was a great months for putting together case studies around market risk. We managed to do three before we ran out of steam and had to include our review of Michael Lewis’ Flash boys in the list. Technically speaking Flash boys is not a market risk case study but it covers so many inter connecting [...]
MFE is a 3 hour long exam with no breaks in between. It consist of 30 multiple choice questions. MFE test theoretical basis of financial models and the application of those models to insurance and other financial risks. It is a little advanced level co...
China Aviation Oil (Singapore) Corporation Ltd. (CAO) was involved in the biggest scandal of the city-state of Singapore since the Nick Leeson case (1995), in which Baring Bank collapsed and lost around $1.3 billion in speculative trading. Following losses of around $550 million, CAO filed for bankruptcy in November 2004. Improper application of accounting principles, and inadequate [...]
A Synthetic Credit Portfolio trader, Bruno Iksil, was given the title of the “London Whale” in the April 6, 2012 issue of the Wall Street Journal and Bloomberg. (Hurtado) This case study focuses on the reasons for that article and the series of derivative transactions (involving credit default swaps) which cost JPMorgan Chase & Co. [...]
Ceylon Petroleum Corporation (CPC) made oil price hedging deals with several banks in 2007 without employing the proper expertise for such a complex option. When the oil market crashed, the hedging deals’ negative payoff for CPC reached several hundred millions. CPC defaulted on the hedging payments which resulted in the banks taking CPC to International [...]
Random musing of founder – From startup rants and timelines to roadmaps. Every now and then, I end up making a promise that I can’t keep. A week ago I promised ten young startup teams that I would create a dedicate learning page for them that they could use as a reference guide once we were [...]
Startup Crash Course for Entrepreneurs Teaching smart people is always difficult. Teaching them about a subject that they possibly know a lot more than you do is an even bigger uphill task. Over the years I have figured out one approach that tends to work better than others. Take a few core ideas and [...]