Option replication and exotics journal

Hello:

Since there are usually several options for hedging, how do you make your choice. If you only consider direct hedge to a futures contract, what % do you allocate for cost of hedge. Are you using VAR, Riskmetrics, or another method of valuing risk?

Thanks,
Steve

 

Riskmetrics is VaR with a reservoir-tip and a fancy wrapper. I wouldn't know how to distinguish, they are synonomous and useless for exotics due to the null-gamma beyond the barriers. The very nature of the thing makes it so.

 

Offset 30 at 120900. ($30,100) Sold 20 NQ at 157400 +$4,650

 

End of month markups in progress bigtime...

 

Yeah, short delta in nikkei, so I felt it was wise to take the correlation. I take the risk of an $80k hit if we reverse on SPX to 1170. If we break 119500 on ES I will get short futures.

I may simply offset the SPX exotic today.

 

Took the hit on this -- covered at 6,800,000. ($75,000). Will tally after SPX and DAX go OTB. I am going to steer-clear of the nikkei for the near-term.

 

Sold 10 ES at 120625 -- small hedge into the 1170 barrier.

 

Flat futures at 120550.

 

Covered futures at 4922 avg. ($23,500)

 

SPX no touch -- 1184.00 cash
Premium: $248,600
Payout: $400,000 [includes prem paid]
Expires: Nov 8, 2005

Short 200 ES from 120825 average -- short synthetic.