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Hedging Higher Order Greeks using EXCEL’s Solver – Package
About the course
The course provides a step by step guide on how to build a hedging model that considers hedging the higher order Greeks of the trader’s position.
The model described is EXCEL based and uses the Solver functionality. The course discusses the setting and purpose of the objective function and constraints. It explains the results in light of various objectives including lower cost, minimization of gamma & vega, etc.
Two simplistic illustrations, one based on hedging a single short position, the other based on hedging a portfolio of short positions, walk the reader through the various elements of the model. Tweaks to the base model are discussed to show how results are impacted when constraints and objectives are changed. Constraint redundancy and portfolio allocation limits are also considered.
The model used in the course assumes the options are European call options on non-dividend paying stocks. Prices & Greeks in the model are calculated using closed form Black Scholes formulae. The package consists of a PDF course and the supporting EXCEL file containing the model.
Below is the table of contents from the course PDF.
After reading this book you will be able to:
- Calculate Greeks - Delta, Gamma, Vega, Rho & Theta - for each option in a portfolio of European call options as well as for the portfolio as a whole, for both the short position portfolio and the hedge portfolio
- Build a Solver based model in EXCEL to hedge against higher order Greeks in the short position portfolio
- Change model parameters to satisfy certain criteria and objectives, fine tune results, and assess constraint redundancy/ usefulness
- Assess and interpret results, recommended allocations and cost
The course is aimed at professionals who deal with pricing, valuation and risk issues related to options and derivatives with non-linear payoffs.
Background in Greeks and option terminology and basic use of EXCEL and the Solver functionality is expected.