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Author: Emanuel Derman Publisher: ISBN: Category : Languages : en Pages :
Book Description
This article presents a practical and useful method for replicating or hedging a target stock option with a portfolio of other options. It shows how to construct a replicating portfolio of standard options with varying strikes and maturities and fixed portfolio weights. Once constructed, this portfolio will replicate the value of the target option for a wide range of stock prices and times before expiration, without requiring further weight adjustments. We call this method static replication. It makes no assumptions beyond those of standard options theory. You can use the technique to construct static hedges for exotic options, thereby minimizing dynamic hedging risk and costs. You can use it to structure exotic payoffs from standard options. Finally, you can use it as an aid in valuing exotic options, since it lets you decompose the exotic option into a portfolio of standard options whose market prices and bid-ask spreads may be better known.
Author: Emanuel Derman Publisher: ISBN: Category : Languages : en Pages :
Book Description
This article presents a practical and useful method for replicating or hedging a target stock option with a portfolio of other options. It shows how to construct a replicating portfolio of standard options with varying strikes and maturities and fixed portfolio weights. Once constructed, this portfolio will replicate the value of the target option for a wide range of stock prices and times before expiration, without requiring further weight adjustments. We call this method static replication. It makes no assumptions beyond those of standard options theory. You can use the technique to construct static hedges for exotic options, thereby minimizing dynamic hedging risk and costs. You can use it to structure exotic payoffs from standard options. Finally, you can use it as an aid in valuing exotic options, since it lets you decompose the exotic option into a portfolio of standard options whose market prices and bid-ask spreads may be better known.
Author: Leif B. G. Andersen Publisher: ISBN: Category : Languages : en Pages : 25
Book Description
This paper presents a number of new theoretical results for replication of barrier options through a static portfolio of European put and call options. Our results are valid for options with completely general knock-out/knock-in sets, and allow for time- and state-dependent volatility as well as discontinuous asset dynamics. We illustrate the theory with numerical examples and discuss the practical implementation.
Author: Antoon Pelsser Publisher: ISBN: Category : Languages : en Pages : 24
Book Description
In this paper we derive a market value for Guaranteed Annuity Option using martingale modeling techniques. Furthermore, we show how to construct a static replicating portfolio of vanilla interest rate swaptions that replicates the Guaranteed Annuity Option. Finally, we illustrate with historical UK interest rate data from the period 1980 until 2000 that the static replicating portfolio is extremely effective as a hedge against the interest rate risk involved in the GAO, that the static replicating portfolio is considerably cheaper than up-front reserving and also that the replicating portfolio provides a much better level of protection than an up-front reserve.
Author: Nassim Nicholas Taleb Publisher: John Wiley & Sons ISBN: 9780471152804 Category : Business & Economics Languages : en Pages : 536
Book Description
Destined to become a market classic, Dynamic Hedging is the only practical reference in exotic options hedgingand arbitrage for professional traders and money managers Watch the professionals. From central banks to brokerages to multinationals, institutional investors are flocking to a new generation of exotic and complex options contracts and derivatives. But the promise of ever larger profits also creates the potential for catastrophic trading losses. Now more than ever, the key to trading derivatives lies in implementing preventive risk management techniques that plan for and avoid these appalling downturns. Unlike other books that offer risk management for corporate treasurers, Dynamic Hedging targets the real-world needs of professional traders and money managers. Written by a leading options trader and derivatives risk advisor to global banks and exchanges, this book provides a practical, real-world methodology for monitoring and managing all the risks associated with portfolio management. Nassim Nicholas Taleb is the founder of Empirica Capital LLC, a hedge fund operator, and a fellow at the Courant Institute of Mathematical Sciences of New York University. He has held a variety of senior derivative trading positions in New York and London and worked as an independent floor trader in Chicago. Dr. Taleb was inducted in February 2001 in the Derivatives Strategy Hall of Fame. He received an MBA from the Wharton School and a Ph.D. from University Paris-Dauphine.
Author: Kyoung-Kuk Kim Publisher: ISBN: Category : Languages : en Pages : 53
Book Description
This study provides a systematic and unified approach for constructing exact and staticreplications for exotic options, using the theory of integral equations. In particular, we focus onbarrier-type options including standard, double and sequential barriers. Our primary approachto static options replication is the DEK method proposed by Derman et al. (1995). However, oursolution approach is novel in the sense that we study its continuous-time version using integralequations. We prove the existence and uniqueness of hedge weights under certain conditions.Further, if the underlying dynamics is time-homogeneous, then hedge weights can be explicitlyfound via Laplace transforms. Based on our framework, we propose an improved version of theDEK method. This method is applicable under general Markovian diffusion with killing.
Author: Salih N. Neftci Publisher: Academic Press ISBN: 0080919979 Category : Mathematics Languages : en Pages : 697
Book Description
Principles of Financial Engineering, Second Edition, is a highly acclaimed text on the fast-paced and complex subject of financial engineering. This updated edition describes the "engineering" elements of financial engineering instead of the mathematics underlying it. It shows you how to use financial tools to accomplish a goal rather than describing the tools themselves. It lays emphasis on the engineering aspects of derivatives (how to create them) rather than their pricing (how they act) in relation to other instruments, the financial markets, and financial market practices. This volume explains ways to create financial tools and how the tools work together to achieve specific goals. Applications are illustrated using real-world examples. It presents three new chapters on financial engineering in topics ranging from commodity markets to financial engineering applications in hedge fund strategies, correlation swaps, structural models of default, capital structure arbitrage, contingent convertibles, and how to incorporate counterparty risk into derivatives pricing. Poised midway between intuition, actual events, and financial mathematics, this book can be used to solve problems in risk management, taxation, regulation, and above all, pricing. This latest edition of Principles of Financial Engineering is ideal for financial engineers, quantitative analysts in banks and investment houses, and other financial industry professionals. It is also highly recommended to graduate students in financial engineering and financial mathematics programs. The Second Edition presents 5 new chapters on structured product engineering, credit markets and instruments, and principle protection techniques, among other topics Additions, clarifications, and illustrations throughout the volume show these instruments at work instead of explaining how they should act The Solutions Manual enhances the text by presenting additional cases and solutions to exercises
Author: Peter Guangping Zhang Publisher: World Scientific ISBN: 9814496146 Category : Business & Economics Languages : en Pages : 696
Book Description
This is the first systematic and extensive book on exotic options. The book covers essentially all popular exotic options currently trading in the Over-the-Counter (OTC) market, from digitals, quantos, spread options, lookback options, Asian options, vanilla barrier options, to various types of exotic barrier options and other options. Each type of exotic options is largely written in a separate chapter, beginning with the basic concepts of the products and then moving on to how to price them in closed-form solutions. Many pricing formulae and analyses which have not previously appeared in the literature are included and illustrated with detailed examples. It will be of great interest to traders, marketers, analysts, risk managers, professors, graduate students, and anyone who is interested in what is going on in the rapidly changing financial market.
Author: Rüdiger Kiesel Publisher: World Scientific ISBN: 9814280119 Category : Business & Economics Languages : en Pages : 414
Book Description
This book combines academic research and practical expertise on alternative assets and trading strategies in a unique way. The asset classes that are discussed include : credit risk, cross-asset derivatives, energy, private equity, freight agreements, alternative real assets (ARA), and socially responsible investments (SRI). The coverage on trading and investment strategies are directed at portfolio insurance, especially constant proportion portfolio insurance (CPPI) and constant proportion debt obligation (CPDO) strategies, robust portfolio optimization, and hedging strategies for exotic options.
Author: Emanuel Derman
Author: Emanuel Derman
Author: Leif B. G. Andersen
Author: Antoon Pelsser
Author: Nassim Nicholas Taleb
Author: Andrew Chou
Author: Kyoung-Kuk Kim
Author: Salih N. Neftci
Author: Hai Po Sun
Author: Peter Guangping Zhang
Author: Rüdiger Kiesel