Understanding gamma – part 1
Introduction Over the last few posts we have spent a fair amount of time looking at delta as a measure of directional price risk. Arguably, the more difficult concept to grasp is that of gamma. …
Option risk management: Part 5 – What do we mean by volatility?
In the previous post we looked at the payoff that combined a short call position with a delta hedge such that the trader was immune from small changes in the underlying price. This is shown…
Published by Fmarketuser
Option risk management: Part 4 – A delta hedged option position
In the previous post we had sold 100 ATM call options on Tesla and hedged the delta exposure by purchasing 56 shares. Using a simple example, we illustrated that the position was immune from small…
Published by Fmarketuser
Option risk management part 3: Delta hedging
Let’s start with a quick recap of a couple of key concepts. Suppose you have bought a 3 month ATM option on Tesla struck at a price of $1,000. With an implied volatility of 60%…
Published by Fmarketuser
Option risk management part 2: Delta
Delta Does anyone remember graph paper? I recall as a 14 year old sitting in a maths class being asked to draw tangents to curves. I never really got the point until I started looking…
Published by SwDev
Option risk management part 1
Intrinsic and time value Over the next few posts we will look at some aspects of option valuation and option Greeks. This first post revisits a couple of valuation principles that are relevant to the…
Published by SwDev
Why inflation breakevens may not reflect ‘true’ of inflation – part 3
Why inflation breakevens may not reflect ‘true’ of inflation – part 3 02 May 2023 Inflation-linked bonds are regarded as being relatively illiquid. But what does this mean? One nice explanation comes from Barclays Bank “The reason…
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Why inflation breakevens may not reflect ‘true’ inflation – part 2
This second post will consider the issue of par floors and how they impact real yields. Some sovereign linker markets issue bonds that protect the investor against deflation. Examples include the USA but not the…
Published by SwDev
Why inflation breakevens may not reflect ‘true’ inflation – Part 1
This is the first of a couple of blogs that look at why inflation breakevens may not be a measure of ‘true’ inflation. One of the most useful relationships in finance is the Fisher equation. …
Published by SwDev
Commodity basket options – Understanding commodity correlations
Commodity solutions are often structured using correlation-dependent options. Let’s say a car producer wishes to hedge their copper and aluminium costs using a single option. They enter into a 3-month equally weighted basket option. With…
Published by SwDev