re : option p & l brad ,
i was extreamly busy yesterday . sorry for answing your question till now .
although i am not exactly sure how the system handle gamma , this is what i
think the system is doing :
curve shift = today ' s price - yesterady ' s price
p / l due to curve shift = today ' s market value using today ' s price curve ( with
everything esle the same as yesterday ' s ) - yesterday ' s market value using
yesterday ' s price curve .
so p / l due to curve shift contains both delta and gamma and higher order
terms .
we then use theoretical gamma ( meaning option model gamma : 0 . 5 * gamma * ( price
change ) 2 ) for gamma contribution and ? define delta = curve shift - theoretical gamma . ? ? therefore , the gamma may not be very accurate to explain the delta change , ? especially when you have big price change due to higher order contribution . ? ? let me know your thoughts on this . ? ? ? best wishes , ? ? zimin ? ? ? ? ? ? ? ? ? brad horn 10 / 12 / 2000 07 : 11 am ? ? to : zimin lu / hou / ect @ ect , stinson gibner / hou / ect @ ect ? cc : vince j kaminski / hou / ect @ ect , vladimir gorny / hou / ect @ ect , robert ? shiring / hou / ect @ ect , jay knoblauh / hou / ect @ ect ? subject : option p & l ? ? gentleman : ? the erms system , as you know , has an excellent capability for ? decomposing option p & l into the following components : ? ? new deals ? curve shift ? gamma ? vega ? theta ? rho ? drift ? 2 nd order adjustments ? ? what i dont understand is the gamma component which is reported in dollars . ? the unit of measure suggests that incremental changes in a contract position ? is being associated with specific prices . these prices are the effective buy ? or sell prices associated with the dynamic delta position . ? ? stated differently , the standard taylor expansion has incorporated a price ? variable in such a way as to convert the unit of measure from gamma ' s ? standard contract count to total gamma dolalrs . this is something i dont ? understand . to date , inquiries to the risk management accounting group has ? further revealed that the gamma component of p & l is not well understood . ? ? this is what concerns me : bridgeline has 2 books with option exposures ( nymex ? and gas daily ) . both books dynamically hedged its positions during ? yesterdays large price move and , through anticipitory hedging in advance or ? during the large price move , secured sufficient coverage to neutralize ? expected changes in delta . however , our p & l from our underlying position did ? not offset our gamma p & l . consequently , i have to ask why ? im hoping that a ? brief look at the why gamma dollars are calculated may reveal something which ? will better guide our hedging decisions . ? ? any help is appreciated ? ?
re : option p & l
brad ,
i was extreamly busy yesterday . sorry for answing your question till now .
although i am not exactly sure how the system handle gamma , this is what i
think the system is doing :
curve shift = today ' s price - yesterady ' s price
p / l due to curve shift = today ' s market value using today ' s price curve ( with
everything esle the same as yesterday ' s ) - yesterday ' s market value using
yesterday ' s price curve .
so p / l due to curve shift contains both delta and gamma and higher order
terms .
we then use theoretical gamma ( meaning option model gamma : 0 . 5 * gamma * ( price
change ) 2 ) for gamma contribution and ? define delta = curve shift - theoretical gamma . ? ? therefore , the gamma may not be very accurate to explain the delta change , ? especially when you have big price change due to higher order contribution . ? ? let me know your thoughts on this . ? ? ? best wishes , ? ? zimin ? ? ? ? ? ? ? ? ? brad horn 10 / 12 / 2000 07 : 11 am ? ? to : zimin lu / hou / ect @ ect , stinson gibner / hou / ect @ ect ? cc : vince j kaminski / hou / ect @ ect , vladimir gorny / hou / ect @ ect , robert ? shiring / hou / ect @ ect , jay knoblauh / hou / ect @ ect ? subject : option p & l ? ? gentleman : ? the erms system , as you know , has an excellent capability for ? decomposing option p & l into the following components : ? ? new deals ? curve shift ? gamma ? vega ? theta ? rho ? drift ? 2 nd order adjustments ? ? what i dont understand is the gamma component which is reported in dollars . ? the unit of measure suggests that incremental changes in a contract position ? is being associated with specific prices . these prices are the effective buy ? or sell prices associated with the dynamic delta position . ? ? stated differently , the standard taylor expansion has incorporated a price ? variable in such a way as to convert the unit of measure from gamma ' s ? standard contract count to total gamma dolalrs . this is something i dont ? understand . to date , inquiries to the risk management accounting group has ? further revealed that the gamma component of p & l is not well understood . ? ? this is what concerns me : bridgeline has 2 books with option exposures ( nymex ? and gas daily ) . both books dynamically hedged its positions during ? yesterdays large price move and , through anticipitory hedging in advance or ? during the large price move , secured sufficient coverage to neutralize ? expected changes in delta . however , our p & l from our underlying position did ? not offset our gamma p & l . consequently , i have to ask why ? im hoping that a ? brief look at the why gamma dollars are calculated may reveal something which ? will better guide our hedging decisions . ? ? any help is appreciated ? ?