How to explain PCA to an option trader

HorseRider · April 5th, 2012, 4:22 pm

Any good answer on this one? Thanks

BrightDay · April 5th, 2012, 4:37 pm

Just reply that it is a mathematical technique for dimentional reduction that will allow him to make even more money.It's all they care about.

willsmith · April 9th, 2012, 5:42 pm

a) Its a black box. b) You stick in >1 timeseries of prices (well returns, but who cares). c) The output tells you whether they all jiggle together or separately, and how much, and in what groupings.d) It can also be used to scare people when you start muttering about eigenvectors and eigenvalues.

frolloos · April 11th, 2012, 5:54 pm

always hedge yourself against traders so just say PCA = Probably a Crappy Algorithm

IRhunter · April 12th, 2012, 6:35 am

Go from 1 to 4. Don't have to mention any more details.1) Risk management technique.2) It allows us to hedge movements of the IRS curve.3) In practice we reduce the number of the underlying swaps, using the correlation between them.4) To understand the method u need first to study Linear Algebra.