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Category Archives: Options Pricing


TARF PSR PFE Exposure calculation model

TARF PSR PFE Exposure calculation model Pre-settlement Risk (PSR) & Potential Future Exposure (PFE) are calculated to assess counterparty credit risk for derivative transactions. PSR calculates the risk of a counterparty default at a static point in time while PFEs assess the risk over the


Hedging Vega and Gamma exposure. Lesson Five

Hedging portfolio Vega and Gamma using solver. Lesson Five For our portfolio model we need an objective function that allows us to minimize the cumulative Greek gap across maturity buckets with respect to Vega and Gamma between the short positions and the proposed hedge portfolio.


Option Greeks. Using Solver to hedge Vega Gamma exposure

Option Greeks. Option Hedging using Excel. Since a spot, forward or future position is linear in its pay off it has no second order derivative. Options on the other hand are non-linear (asymmetric payoffs). While we can get away with hedging Delta with a linear


Implied and Local Volatility Surfaces in Excel – Final steps

Building Local Volatility Surfaces in Excel – Lesson Five So far in our volatility surface tutorial over the last few days we have covered: Lesson 1 – Volatility surfaces, implied volatilities, smiles and skews Lesson 2 – Volatility surface, deep out of the money options and lottery


Creating the volatility surface dataset using implied volatilities

Creating the implied volatility surface dataset for building The downloaded implied volatility dataset from your volatility data sources generally includes the following information: Figure 1 Raw Implied Volatility dataset For a quarterly sample data snapshot on a daily basis it is not uncommon to end