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procedure to find the PCs of a trade
is there any good book/paper that gives the procedure to find the principle components of a given trade?
procedure to find the PCs of a trade
Trades don't have principal (correct spelling) components, but the underlying market may. Give us a few more details of what you are looking for, and maybe somebody will put forth something helpful.
procedure to find the PCs of a trade
Dupe...
Last edited by bearish on September 22nd, 2013, 10:00 pm, edited 1 time in total.
procedure to find the PCs of a trade
in the paper by Salomon Smith Barney http://www.hughchristensen.co.uk/PaperD ... onBros.pdf, "If the sensitivity of each hedge securityto each component is known, it is straightforward to solve for the weights for eachindependent trade analytically by linear algebra." but it does not go on and say how this is done. ie how do i find the sensitivity of each security to each PC?
Last edited by iniesta on September 22nd, 2013, 10:00 pm, edited 1 time in total.
procedure to find the PCs of a trade
The PCs say how the term structure moves. So if you follow this and revalue your derivative under the PC-shocked term structure for each PC, then you have the sensitivity of your instrument to each PC.