Derivatives
Value at Risk
While the Greek letters view portfolio risk from multiple angles and generate numerous risk measures, the VaR (Value at Risk) metric is an attempt to express portfolio risk […]
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Category: Excel Models
Derivatives
Finite Difference Methods
The finite difference method, beyond finance, is actively used in physics and engineering fields, such as: The method involves breaking down a continuous differential equation into a system […]
Derivatives
Monte Carlo in Option Pricing
The main advantage of the Monte Carlo simulation method over binomial trees is that it can be used to price options whose payoff depends not only on the […]
Derivatives
American Options – Binomial Trees
One method used to value an American option is the construction of a binomial tree. I have written about this before (Binomial Trees), so here I will focus […]
Derivatives
Portfolio Insurance with Synthetic PUTs
The presence of a risk-free asset portion in a portfolio can insure its value with almost the same precision as purchasing put options. The value of a diversified […]
Derivatives
The Greeks – Gamma (Ξ)
Also, the relationship between the option price and the underlying price is not linear. Gamma determines the degree of curvature of this relationship. It is the second derivative […]
Derivatives
The Greek Letters
π As we saw, Delta Hedging is a very effective tool for hedging the risk of a sold option.βοΈ When a portfolio becomes Delta Neutral, changes in the […]