# Options futures and other derivatives 9th edition test bank

Delta hedging is straightforward. Hull and White try a different approach. In addition to the theoretical developments he has contributed to the development of numerical procedures used to evaluate the models in practice. One approach for calculating a minimum variance delta is to replace the Black-Scholes model by a stochastic volatility model.

The correct approach is to set. The value of the expected change depends on the stochastic volatility model being used. Alan White is the Peter L.

If an assumption is made about the partial derivative:. He is the Associate Editor of the Journal of Derivatives. Option traders are subject to delta limits and must usually ensure that their delta exposure is within these limits at the end of each day. Subscribe to our Blog.

Delta can be adjusted in a straightforward way by trading the underlying asset. The model for valuing a portfolio dependent on a particular stock or an equity index or equity index then takes the form:. This leverage argument suggests that the causality is from the equity price to the volatility.

His books have been translated into many languages and are widely used in trading rooms throughout the world, as well as in the classroom. If an assumption is made about the partial derivative:. Delta is by far the most important Greek letter when portfolios of derivatives are being managed. Sometimes limits are expressed in terms of the equivalent dollar position in the underlying asset. It measures the sensitivity of the value of a portfolio to small changes in the value of the underlying asset.

For example, if the process for the asset price is. When volatility increases decreases the stock becomes more less risky as an investment so investors require a higher lower return than previously and the stock price therefore decreases increases. Get every blog post in your inbox. The value of the expected change depends on the stochastic volatility model being used.

If an assumption is made about the partial derivative:. In addition to the theoretical developments he has contributed to the development of numerical procedures used to evaluate the models in practice. However this would be incorrect as it would be considering the effect of a change in the asset price without any change in volatility—even though a stochastic volatility model is being used. He is the Associate Editor of the Journal of Derivatives.

Delta hedging is straightforward. These models are widely used by financial engineers in trading rooms around the world to value a wide variety of derivative products. Moving from the traditional Black-Scholes delta to the minimum variance delta does this.

When an equity price changes there is a tendency for volatility to change as well. This is in contrast to vega and gamma hedging where positions in options or other non-linear products are required to effect changes. Minimum Variance Delta Hedging December 13, The value of the expected change depends on the stochastic volatility model being used. His books have been translated into many languages and are widely used in trading rooms throughout the world, as well as in the classroom.

Traditionally delta has been calculated as the partial derivative of the value of the portfolio with respect to the underlying asset. Subscribe to our Blog. The Wiener process determining the evolution of the volatility is assumed to be negatively correlated with the Wiener process driving the evolution of the asset price. His books have been translated into many languages and are widely used in trading rooms throughout the world, as well as in the classroom.