Derivate
« Previous EntriesExercise
Sunday, October 30th, 2011Of an option, to put into effect the right to buy or sell at the strike price.
European-style option
Friday, October 28th, 2011An option which can only be exercised on expiration.
Elasticity
Thursday, October 27th, 2011Properly a measure of the percentage change in the option premium for a 1% change in the asset price. Sometimes loosely used as a synonym for delta (delta strictly measures the absolute change in the option premium for a one unit change in the underlying). Because elasticity is usually significantly positive (a 1% change in [...]
Dynamic hedging
Sunday, October 23rd, 2011Replication of the payoff of a portfolio long the underlying and long a put by continuous delta hedging. It started as a theory of Hayne Leland and Mark Rubenstein on the back of the Black-Scholes model. It was used to provide put protection for equity portfolios at a time when portfolio puts were not available. [...]
Delta positive
Friday, October 21st, 2011Call options are said to be delta positive because their value increases by the value of delta for a one unit rise in the price of the underlying. Put options are said to be delta negative because their value decreases in value by delta for every one unit rise in the price of the underlying. [...]
Delta neutral
Thursday, October 20th, 2011An option portfolio delta-hedged such that it has no exposure to small moves in the price of the underlying. In practice, since delta is altered by all but the very smallest changes in the price of the underlying, by the volatility of that price, by the maturity of the option, by how close-to-the-money the option [...]
Delta hedging
Wednesday, October 19th, 2011Delta is the neutral hedge ratio derived from the Black-Scholes model the ratio of underlying asset to options necessary to create the risk-free portfolio that is at the heart of the Black-Scholes option pricing formula. So the delta of a stock option indicates the number of shares needed to hedge a position in an option [...]
Basic options terms
Tuesday, October 18th, 2011ome of this is necessary to express the basic operation of options contracts (such as ‘premium’ or ‘exercise price’) and some of it is the result of the mathematical complexity of option pricing. In particular, it is impossible for any potential user of options to avoid contact with the ‘Greeks’ a set of Greek letters [...]
Collateralized Mortgage Obligation (CMO)
Sunday, October 2nd, 2011A note or bond or tranches of notes and/or bonds that an SPV (q.v.) issues, in order to raise money to buy mortgage loans that serve as collateral for the note(s). Application: The CMO gets the bonds off the balance sheet of the CMO’s creator, thus eliminating credit exposure, in return for cash, and allows the [...]
Collateralized Loan Obligation (CLO)
Thursday, September 29th, 2011A note or bond or tranches of notes and/or bonds that an SPV (q.v.) issues, in order to raise money to buy loans that serve as collateral for the SPV obligations. Application: The CLO gets the loans and attendant exposure off the balance sheet of the SPV’s creator, in return for cash, and allows the creator [...]
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