Confidential Peer Evaluation N AME : O VERALL CONTRIBUTION TO TEAM SUCCESS T EAM W ORK Q UALITY OF WORK A MOUNT OF WORK K NOWLEDGE OF THE PROJECT AREA I DEAS CONTRIBUTED TO THE PROJECT O RGANIZATION OF TEAM WORK ( ADMIN.) T EAM R APPORT L EADERSHIP E NTHUSIASM, ATTITUDE, INITIATIVE R ESPECT FOR OTHERS D EPENDABILITY, GOOD TEAM PLAYER M EETING ATTENDANCE, PUNCTUALITY May affect your grade
Financial Information Management Hedging Gamma, Vega, Theta & Rho
Gamma Delta ( ) measures the change in portfolio value as the underlier’s price S changes (~speed). Gamma ( ) measures the rate of change in portfolio value as S changes (~acceleration).
Meaning of Gamma Gamma is small If Gamma is small (abs.), small changes in S will not affect much Delta (and your portfolio value), so there is less need to take immediate rebalancing action. Gamma is large If Gamma is large, small changes in S will affect Delta (and your portfolio value) significantly, so there is a stronger need to take immediate rebalancing action.
Using Gamma During small periods of time t 2 -t 1 Portfolio = ½ (S 2 -S 1 ) 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 (S 2 -S 1 ) 2 = 0.5 * (-10,000) * (52-50) 2 = -$20,000 ~
How to Calculate Gamma Gamma = N’(d1) S t N’(d1) = e –(d1) 2 /2 (2 ) 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) portfolio <> 0 2) portfolio + x qty x = 0 3) qty x = - portfolio / x Warning: Acquiring qty x will disturb Delta neutrality. You will need to rebalance.
Delta Gamma Delta It’s a strategy, not a sorority. Find out what to acquire to achieve Delta neutrality. Find out what to acquire to achieve Gamma neutrality. 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 Rho Conceptually 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
Financial Information Management WINIT What Is New In Technology?
Financial Information Management Homework Spartan 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