I am new to exotic options pricing and risk management. The scenario that I encounter is that the market maker sells snowball autocallable products(accumulated coupon) every trading day and has to manage a big portfolio that is heterogeneous in underlying asset, time to maturity, strikes(both knock-in and knock-out). Basically, the market maker earns money from issuing snowball autocallables by doing 'gamma scalping'(doing delta hedge) while asset prices moves downward and upward. However, this is only one aspect of the whole scheme of snowball product management.

Therefore, I am confused about the following question:

  1. The risk event of doing hedging on snowball autocallables occurs when asset price breaches the knock-in or knock-out price, where the Greeks usually has drastic changes(delta bounces over 100%, gamma/vega changes sign). Is there any explanation about this phenomenon? P.S. I failed to find any in Taleb's book "Dynamic Hedging".

  2. Since the delta hedging of snowball autocallables is also where gamma scalping works, is it possible and profitable to do gamma/vega hedging to scalp other Greeks? Considering the gamma/vega for snowball could be very volatile near the knock-in barrier...

  3. For incoming transactions, how to bucket newly sold snowball autocallables with those that have been existing for some while? I understand that in vanilla example, we can group options by time to maturity and underlying(P.S. strikes are irrelevant since it doesn't affect the time of option payoff), and hedge the Greeks of each group. But for snowball, there is no exact 'time to maturity', as the barrier option would expire at any time when asset price breaches the knock-out barrier. So, how to do bucketing under this condition?

Thanks a million! It would be more appreciated if you talk about it from the view of trading/risk desk.



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