The Greeks and Hedging Explained (Financial Engineering Explained) by Leoni, Peter -- Read -- Imperial Library of Trantor

Index

Title Copyright Contents List of Figures Preface 1 Hedging Contingent Claims

1.1 Introduction 1.2 Setting Some Notation 1.3 Hedging Forwards 1.4 What Are Calls and Puts? 1.5 Pricing and Hedging Options in the Binomial Tree model 1.6 Pricing and Hedging Options in the Black–Scholes Model

1.6.1 Elimination of the Risk Factor 1.6.2 Black–Scholes Results 1.6.3 Underlying Distribution

1.7 Put-Call Parity as a Perfect Hedge 1.8 Some Concepts and Terminology

1.8.1 Options can be ITM, OTM or ATM 1.8.2 Time Value and Extrinsic Value 1.8.3 Being Long, Short or Flat and Neutral 1.8.4 Mark-to-Market 1.8.5 Mark-to-Model 1.8.6 P&L

2 Delta Hedging in the Perfect World

2.1 Some of the Aspects of Volatility 2.2 Flaws and Vigours of the Black–Scholes Model 2.3 Flavours of Volatility

2.3.1 Realised Volatility 2.3.2 Historical Volatility 2.3.3 Instantaneous Volatility 2.3.4 Imposed Volatility 2.3.5 Implied Volatility 2.3.6 Hedging Volatility 2.3.7 VIX, the Volatility Index

2.4 Setting up the Experiment 2.5 Doing More Experiments

3 The Balance between Gamma and Theta

3.1 Expanding the Option Price 3.2 Defining the Greeks: Gamma 3.3 Defining the Greeks: Theta 3.4 Gamma and Theta, Always Flirting 3.5 How Cute do they Look?

3.5.1 Delta Looks Smart 3.5.2 Gamma Looks Sexy 3.5.3 Theta Looks Naughty

3.6 Cheating with the Hedging Volatility

4 Trading Is the Answer to the Unknown

4.1 Uncertainty and Confusion 4.2 Bringing Order 4.3 Internal Markets 4.4 Is It time to Look at the Time? 4.5 Volatility as a New Asset Class

5 Vega as a Crucial Greek

5.1 Why Vega Is Different from Other Greeks 5.2 Taking Off the Mask

5.2.1 Vega through Market Changes 5.2.2 Vega through Time 5.2.3 Vega with Volatility

5.3 The Old Greeks Revised

5.3.1 Delta Attacked by Volatility 5.3.2 Gamma Weakened by Volatility 5.3.3 Theta Strengthened by Volatility

6 The Greek Approximation

6.1 Let’s Walk Before We Run 6.2 Bringing Some Gamma to Taylor 6.3 Managing through Time 6.4 Beyond the Model 6.5 More Greeks Than You Can Handle 6.6 The P&L in Greek 6.7 The Vega Matrix 6.8 Portfolio Effects and Exotic Structures 6.9 Long and Short the Greeks

7 Volatility Term Structure

7.1 Why Do We All Drive a Black–Scholes Car? 7.2 Deterministic Changes in Volatility

7.2.1 So What’s the Big Deal? 7.2.2 Theta Looks at Vega 7.2.3 Hedging Under Term Structure

7.3 Market Term Structure

8 Skew and Smile

8.1 What Can We Really Imply? 8.2 How Do We Start Smiling? 8.3 How Does a Smile Turn into a Smirk? 8.4 Skew Is Not a Crystal Ball 8.5 Measuring and Trading Skew

8.5.1 Option Prices Are Increasing/ Decreasing 8.5.2 Can We Smile any Which Way We Want? 8.5.3 Implied Distribution and Probabilities

8.6 Parametric Skew Model 8.7 The Skews in the Market Across Maturities 8.8 Non-Arbitrage Conditions 8.9 How Does Skew Change Over Time?

Bibliography Index