Tuesday, February 28, 2012

A Brilliant Madness, The John Nash Documentary

Known for Nash Equilibrium, John Nash is one of the largest contributors to Game Theory.

Documentary Summary: Nash had a thing for, and approached mathematical problems from different standpoints since childhood. Some consider him a genius, I think he simply had a lot of deliberate practice off to his passion for problem solving. Long story short, he was kind of a dick in his younger days, was then hospitalized and classified as a schizo, later recovered and received a Nobel Prize. He's still alive today, I think.

Wednesday, February 22, 2012

Delta hedging's popular, what about gamma/vega hedging?

Lyuu's research paper explores the modeling of portfolio value between delta and delta + gamma hedging. The reason we'd want to hedge gamma or vega with other options, is so that we may lower the expected cost of hedging respective to potential portfolio returns.

The bottom line here's pretty simple. A long theta position that's delta + gamma/vega neutral has much more desirable risk containment, cause negative gamma kills. .

Delta-hedging alone requires forecasting of realized volatility
Derman explains this pretty well in the following study,

Saturday, February 18, 2012

What everybody thinks we do

Friday, February 17, 2012

Everything is a Remix (about Intellectual Property)

Wednesday, February 15, 2012

Hedging for credit instruments (Yale Lecture Video)

Yale Lecture from Fall, 2009.

Financial Theory (ECON 251)

00:00 - Chapter 1. Fundamentals of Hedging
15:38 - Chapter 2. The Principle of Dynamic Hedging
24:26 - Chapter 3. How Does Hedging Generate Profit?
43:48 - Chapter 4. Maintaining Profits from Dynamic Hedging
54:08 - Chapter 5. Dynamic Hedging in the Bond Market
01:10:30 - Chapter 6. Conclusion

Complete course materials are available at the Open Yale Courses website: http://open.yale.edu/courses
This course was recorded in Fall 2009.

Tuesday, February 14, 2012

Cross Instrument optimal hedge ratio

When it comes to trading spreads, i.e. combinations of financial assets, it's pretty important to have a hedge ratio for lowest standard deviation of future portfolio returns. So here is the standard method.

* The example uses a futures contract to hedge against a spot/cash position.

Source: Wolfram Alpha: Calculator for Minimum Variance Hedge Ratio


Here's also a video example between jet fuel and oil futures by Bionic Turtle

Monday, February 6, 2012

Rogue Trader (Movie review)

I finally watched the Nick Leeson movie, Rogue Trader (1999), and it was pretty good. It offered an interesting look at the raw exchange auction process back in those days, how the big guys made a lot of their money off pure arbitrage, and a lot of the floor traders really didn't know what they were doing.


Leeson basically attempted to make money by pushing the Nikkei futures by brute force each day, and had to increased order size exponentially to maintain the deception of consistent profits. He was able to do it as there wasn't a separate entity keeping the books at his office. Of course inevitably, it all came crashing down. He single handedly caused the fall of Barings Bank.

Some beliefs confirmed through the movie
  1. Making money in this game is about grinding out profits while maintaining risk limits
  2. Proper book keeping is CRUCIAL, i.e. know your EXACT delta, gamma, vol exposure
  3. Fraud is bad.