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AmandaHugNKiss
04-30-2007, 12:19 AM
There is actually two things that I hope someone can clarify for me. I'm referencing ASM....
First, I'm having trouble with section 12.3 about the Rehedging and variance. Can someone explain what h is measuring. I do not understand how to get the units right when calculating this variance. Like if we are rehedging every day, what will the variance be yearly?

Second, I'm kind of confused with 12.4, hedging multiple greeks. Specifically, can someone explain in words why the delta equation in example 12G is set up the way it is. Im confused on why there is a x1 in this problem, while in Quiz 5, there is not an x1 without a coefficient. Maybe if someone explains it in words, I might understand it better.

Thanks.

CamNZ
04-30-2007, 01:51 AM
My understanding:

h is the length of interval between rehedging in period i. If i is one year and the interval is 1 week then, h = 1/52. If i is one week and the interval is one day then h = 1/7. Formula 12.5 gives Var(R) over h, to find variance over i: (1/h)*Var(R)

Example 12G, you can't use the stock (x1) to hedge against gamma, only options have a gamma component.

AmandaHugNKiss
04-30-2007, 10:30 AM
My understanding:

Example 12G, you can't use the stock (x1) to hedge against gamma, only options have a gamma component.

So on quiz five, the reason we don't use shares of stock in the delta hedging is because it says in the problem "the stock itself will not be bought or sold"??

Boertjie
05-01-2007, 07:46 PM