Option replication and exotics journal

steve46 · Oct 30, 2005

Hello:

Since there are usually several options for hedging, how do you make your choice. If you only consider direct hedge to a futures contract, what % do you allocate for cost of hedge. Are you using VAR, Riskmetrics, or another method of valuing risk?

Thanks,
Steve

riskarb · Oct 30, 2005

Riskmetrics is VaR with a reservoir-tip and a fancy wrapper. I wouldn't know how to distinguish, they are synonomous and useless for exotics due to the null-gamma beyond the barriers. The very nature of the thing makes it so.

riskarb · Oct 31, 2005

Quote from riskarb:

SPX no touch -- 1170.00 cash
Premium: $49,600
Payout: $100,000 [includes prem paid]
Expires: Nov 3, 2005

Short 30 Dec ES at 118900 into the barrier. Expect a rally over the next week to ten days.

Short the weak, long-delta synthetic straddle.

Offset 30 at 120900. ($30,100) Sold 20 NQ at 157400 +$4,650

ssternlight · Oct 31, 2005

Quote from riskarb:

Offset 30 at 120900. ($30,100) Sold 20 NQ at 157400 +$4,650

End of month markups in progress bigtime...

riskarb · Oct 31, 2005

Yeah, short delta in nikkei, so I felt it was wise to take the correlation. I take the risk of an $80k hit if we reverse on SPX to 1170. If we break 119500 on ES I will get short futures.

I may simply offset the SPX exotic today.

riskarb · Nov 1, 2005

Quote from riskarb:

Nikkei double barrier no touch -- 12,950//13,950
Premium: 15,400,000Y
Payout: 25,000,000Y [includes prem paid]
Expires: Nov 7, 2005

Smile has flattened into the US advance. I'll hedge this one aggressively if need be.

Took the hit on this -- covered at 6,800,000. ($75,000). Will tally after SPX and DAX go OTB. I am going to steer-clear of the nikkei for the near-term.

riskarb · Nov 1, 2005

Quote from riskarb:

Yeah, short delta in nikkei, so I felt it was wise to take the correlation. I take the risk of an $80k hit if we reverse on SPX to 1170. If we break 119500 on ES I will get short futures.

I may simply offset the SPX exotic today.

Sold 10 ES at 120625 -- small hedge into the 1170 barrier.

riskarb · Nov 2, 2005

Quote from riskarb:

Sold 10 ES at 120625 -- small hedge into the 1170 barrier.

Flat futures at 120550.

riskarb · Nov 2, 2005

Quote from riskarb:

DAX no touch -- 4750.00 cash
Premium: $55,200
Payout: $120,000 [includes prem paid]
Expires: Nov 3, 2005

Short 10 Dec FDAX from 4845 avg.

Short weak synthetic straddle, bull delta.

Covered futures at 4922 avg. ($23,500)

riskarb · Nov 2, 2005

SPX no touch -- 1184.00 cash
Premium: $248,600
Payout: $400,000 [includes prem paid]
Expires: Nov 8, 2005

Short 200 ES from 120825 average -- short synthetic.