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This looks like a classic real options problem. Essentially, each decision is an option which will be chosen strategically: the owner will chose a vector of actions from all possible actions, $A\in\mathcal{A}$, that maximizes expected utility given the distributions of key variables and outcomes. If the owner is well-capitalized, maximizing the expected ...


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You can decompose swap returns this way although I would argue that you should think more in terms of risk factors. For most any fixed income instrument (and especially for swaps), we often break exposure into three types of yield curve movements which explain the most variation, aka the Litterman and Scheinkmman (1991) factors: Changes in level (equivalent ...


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One way to estimate the credit risk of a bond is to look at the price of insuring the bond using a Credit Default Swap, which will cost roughly the spread between the bond's yield and the yield of a risk free bond with the same maturity (typically we use a government bond here). Using simple assumptions, this leads us to the Credit Triangle, $$K = (1-R)\...


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They are neither predictive or descriptive, but proscriptive it is a pre-emptive warning of the worst case scenario, of which you are being given notice to take action to avoid. It is risk management.


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To continue the discussion in the comments but in order to not put answer there: Section 2.6 from these notes by Mark Davis mentioned in this question describes hedging error in the Black-Scholes world. There is no direct relation between marking to market and hedging error. If you continuously hedge and have a perfect model which is correctly calibrated, ...


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As @ir7 did, I only briefly want to add to @noob2's spot-on answer. He's of course right and $\Lambda=\Delta\frac{S}{V}$ decides how risky the option is compared to the stock. Firstly, note that $\Lambda=\frac{\frac{\partial V}{V}}{\frac{\partial S}{S}}=\frac{\partial V}{\partial S}\frac{S}{V}$. An economist would call $\Lambda$ an elasticity. It tells you ...


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A good method for getting the proportions would be to use Sharpe's returns-based style analysis. Style Analysis is a constrained regression. Regress the returns of the fund against the two underlying equities and you can see weights in the individual equities. This method would come with a lot of caveats though - the weights returned would be an average over ...


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