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Nov 26 |
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Implied Volatility for Asian option Thanks for your quick response. I have tested Asians with local vol and find they price slightly higher than my semi-analyic model (~5bps for 1y monthly atm). As, you said, these things trade so tight that such a discrepancy would put you off market (assuming not just an implementation glitch in my lv). Risk representation coming from lv would then be another matter entirely. |
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Nov 26 |
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When does delta hedging result in more risk? Market makers who are dependent on the market moving in specific ways are probably very bad volatility traders. Exactly - by hedging your delta with the cash, you're basically taking on a naked cash position, and thus are more dependent on the market moving in a specific fashion. IMO, short dated wings are best left unhedged, or leaning your deltas strongly towards them. |
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Nov 26 |
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When does delta hedging result in more risk? I'm with @Strange on this one. In the above example of the 95 put expiring friday, if you hedge with underlying to be delta flat, you are implicitly long delta, no doubt about it. The option will bleed delta rapidly and you'll be left holding hard stock. Moreover, the premium of wings is very sticky - if the market ticks up or down, the premium ain't gonna move with the delta, meaning your PL is solely being driven by your cash position. |
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Nov 26 |
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Implied Volatility for Asian option Is local vol used in practice for Asian options? I was under the impression most dealers still used analytic approximations. |
