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by EdisonCruise
December 22nd, 2014, 1:12 am
Forum: General Forum
Topic: Expectation of volatility or sqrt(expectation of variance)?
Replies: 6
Views: 3663

Expectation of volatility or sqrt(expectation of variance)?

<t>We are going to price option with volatility forecasted by Garch(1,1). Based on Javaheri and Wilmott's paper "Garch and Volatility Swaps", one can calculate expectation of volatility or sqrt(expectation of variance) after calibration of Garch(1,1). The difference of two is a convexity adjustment ...
by EdisonCruise
December 18th, 2014, 3:42 pm
Forum: Trading Forum
Topic: OTM option in pairs trading
Replies: 1
Views: 3551

OTM option in pairs trading

<t>Suppose I find two future contracts A and B, which is cointegrated. A' price should go up and B' price should go down based on their cointegration relationship by Engle-Granger's method. If I am not confident on A, I prefer to long A's OTM call option rather than A's future. I still want to short...
by EdisonCruise
November 30th, 2014, 3:02 pm
Forum: Student Forum
Topic: How to calculate the expectation of Brownian bridge?
Replies: 0
Views: 3039

How to calculate the expectation of Brownian bridge?

<t>Suppose a Brownian bridge Bt in a period [0,T],starting from 0 and back to 0. 0<s<t<T, how to calculate expectation E[Bs|Bt]?My understanding is:(1) since the definition Bt=Wt-(t/T)*Wt, then Wt=T*Bt/(T-t). Is condition on Bt equivalent to condition on Wt, so E[Bs|Bt]=E[Bs|Wt]?(2) then:E[Bs|Bt]= E...
by EdisonCruise
October 29th, 2014, 1:18 am
Forum: General Forum
Topic: How to use Black Scholes framework practically for option sell side?
Replies: 1
Views: 3565

How to use Black Scholes framework practically for option sell side?

<t>Black Scholes framework is imperfect in fact. In practice, we need to consider the volatility risk and jump risk. And we hope to incorporate these risks into the option price. So what is the advisable and practical way to price option in BS framework considering these risks? I also wonder what th...
by EdisonCruise
October 24th, 2014, 12:10 am
Forum: Technical Forum
Topic: What can we do during in delta-hedging when volatility increases?
Replies: 7
Views: 4044

What can we do during in delta-hedging when volatility increases?

<t>The optimal sigma_h to hedge is the expected realized volatility over your hedging period. Could you please explain further why "The optimal sigma_h to hedge is the expected realized volatility over your hedging period"? The "expected realized volatility" changes as time passes, so we need to kee...
by EdisonCruise
October 23rd, 2014, 2:52 pm
Forum: General Forum
Topic: How to use stochastic volatility model without option data?
Replies: 3
Views: 3583

How to use stochastic volatility model without option data?

Thank you for asking.I want to to hedge a commodity call option, but I can only trade the future. I cannot be long or short any other option from the market. I am exposed to risks including the changes of underlying price and its volatility.
by EdisonCruise
October 23rd, 2014, 12:53 pm
Forum: General Forum
Topic: How to use stochastic volatility model without option data?
Replies: 3
Views: 3583

How to use stochastic volatility model without option data?

<t>As I know it is common to use in-the-counter option data to calibrate stochastic volatility models like Heston or SABR. What if we have no option data? I am also interesting to know the followings:(1) Is there any robust method to calibrate Heston/SABR with historical time series?(2) It is easier...
by EdisonCruise
October 23rd, 2014, 12:36 pm
Forum: Technical Forum
Topic: What can we do during in delta-hedging when volatility increases?
Replies: 7
Views: 4044

What can we do during in delta-hedging when volatility increases?

<t>I know there is a relationship as below:[$]PnL=(Option price sold-Estimated Option value)+ \[\int_0 ^T (sigma_h(t)^2-sigma_r(t)^2) S^2*Gamma_h*dt\][$]given in PARAMETER RISK IN THE BLACK AND SCHOLES Model where sigma_h is the sigma used to calculate delta, sigma_r is the real volatility. Assume w...
by EdisonCruise
October 23rd, 2014, 7:41 am
Forum: Technical Forum
Topic: What can we do during in delta-hedging when volatility increases?
Replies: 7
Views: 4044

What can we do during in delta-hedging when volatility increases?

<t>Yes, you are right. We must loss if the option is sold at volatility lower than the realized one. However, is there any trading strategy to reduce the loss or the standard deviation of final PnL if this happens? It seems there is a stop-loss/start-gain strategy in such a case, given by Peter Carr...
by EdisonCruise
October 23rd, 2014, 2:45 am
Forum: Technical Forum
Topic: What can we do during in delta-hedging when volatility increases?
Replies: 7
Views: 4044

What can we do during in delta-hedging when volatility increases?

<t>What can we do during in delta-hedging when volatility increases?Suppose that we made a forecast in the coming one year, the realized volatility is sigma_0. Then we sold an option at sigma_0. After a few days we may make a new forecast, in the coming year, the realized volatility should be sigma_...
by EdisonCruise
September 24th, 2014, 2:22 am
Forum: General Forum
Topic: How to quantify loss due to Gamma risk?
Replies: 0
Views: 3460

How to quantify loss due to Gamma risk?

<t>Now suppose I sold a put option P and perform a delta hedging discretely under the standard Black-Scholes framework. If the underlying suddenly goes down from S0 to St, I failed to change my delta accordingly. Then my loss is (St-S0)*delta(S0)-[P(St)-P(S0)]. If the difference between S0 and St is...
by EdisonCruise
August 20th, 2014, 9:17 am
Forum: Technical Forum
Topic: How to hedge volatility swap?
Replies: 0
Views: 3864

How to hedge volatility swap?

<t>There are lots of references on pricing vol swap. But I am still confused on how to hedge it. (1) If we are using the typical methods in John Hull?s book, which requires trading a future and many call/put options. How to can calculate delta and hedge it dynamically?(2) If we are using a stochasti...
by EdisonCruise
August 7th, 2014, 1:06 pm
Forum: Technical Forum
Topic: Any other method to reduce option price for investor?
Replies: 1
Views: 3732

Any other method to reduce option price for investor?

<t>An investor usually finds the price of a plain vanilla call option costs too much. So up-out option can be used if the investor finds the underlying price cannot go too high. Alternatively, the bank can sell a call and buy a down-in put from the investor to reduce the total cost. I can only figur...
by EdisonCruise
July 22nd, 2014, 2:28 pm
Forum: General Forum
Topic: How to price future option with non-negligible margin cost?
Replies: 0
Views: 3774

How to price future option with non-negligible margin cost?

<t>We are trading options on future. No matter we are long or short the future, we need to pay a margin m (proportional to the future value F) to enter the future position. We need to borrow money at interest rate p to pay the margin. Now suppose we short an option f on future F, and hold delta numb...
by EdisonCruise
May 18th, 2014, 1:11 pm
Forum: General Forum
Topic: How to price a collar more accurately?
Replies: 6
Views: 4828

How to price a collar more accurately?

QuoteOriginally posted by: daveangelone would normally sell otm calls and but otm puts in a collar.Thank you so much for your reply, but we are on the sell side. our client is more concerned about the commodity price going up.
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