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2 votes

Option: link between Vega and Gamma

This is simple. If you are far away from maturity, your option price will more sensitive to volatility on your underlying, effective change on your underlying price won't have any significative impact....
JohnGalt's user avatar
2 votes

Option: link between Vega and Gamma

$Vega*(Vol1-Vol2)=C(t,S(t),vol1)-C(t,S(t),vol2)$ (1=2) where vol1 and vol2 are close enough for 1 and 2 to be the same. Now we delta hedge both calls at implied volatility. We ignore that change in ...
Arshdeep's user avatar
  • 2,451
2 votes
Accepted

Caplets volatility questions

Your question actually covers two different aspects: The impact of correlation on (say) the 6x9 caplet, i.e. an option on a 3m forward rate expiring in 6m time. Correlation between different parts of ...
David's user avatar
  • 76
2 votes

Complicated barrier options

Based on my understanding of what you wrote, I would propose the following solutions: The down-in-call barrier doesn't expire when $S_t < B$, it just activates and changes into the long call short ...
KaiSqDist's user avatar
  • 1,474
2 votes

Improving Portfolio Optimization on a Mean-Variance Basis

Yes there is a big benefit in doing research on improving MVO. After all, the tangency portfolio is the best portfolio under several not super crazy assumptions. There has been a lot of work and ...
phdstudent's user avatar
  • 8,421
1 vote
Accepted

How to fix my Monte Carlo simulation?

The problem is that the Heston process describes variance as a mean-reverting process (towards theta). Therefore, if you specify variance as higher than 0.0398 (the theta level it reverts to), the ...
KaiSqDist's user avatar
  • 1,474
1 vote
Accepted

Option: link between Vega and Gamma

When you hedge an option's delta at implied volatility, the resulting PnL over timestep, dt, is: $$ PnL = (\Delta_i * dS + \frac{\Gamma_i dS^2}{2} + \Theta * dt) - \Delta_i * dS $$ Leaving: $$ \frac{\...
Newquant's user avatar
  • 804
1 vote

Option: link between Vega and Gamma

I have another answer. We know by the link, the call valued at the incorrect vol (beta) loses gamma PnL. We know the call valued rightly loses no PnL (all strategies are fair in the risk neutral world)...
Arshdeep's user avatar
  • 2,451

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