1. Financial Information Management Gamma Hedging Wilhelm's Warriors No Hedgetation The Gobs of Money Machine The Ira Harris Experience

2. Critical Thinking  Good job overall  Easy meter  Today office hours: 4-6

3. The Hedge Tournament  Questions?

4. Price generation SP500SP500 beta + noise STOCKS Bids and Asks OPTIONS Bids and Asks B.S.+ noise real g, real volatility real initial prices real beta, real volatility NOT random!

6. Confidential Peer Evaluation N AME : O VERALL CONTRIBUTION TO TEAM SUCCESS T EAM W ORK Q UALITY OF WORK A MOUNT OF WORK K NOWLEDGE OF THE PROJECT AREA I DEAS CONTRIBUTED TO THE PROJECT O RGANIZATION OF TEAM WORK ( ADMIN.) T EAM R APPORT L EADERSHIP E NTHUSIASM, ATTITUDE, INITIATIVE R ESPECT FOR OTHERS D EPENDABILITY, GOOD TEAM PLAYER M EETING ATTENDANCE, PUNCTUALITY May affect your grade

7. Financial Information Management Hedging Gamma, Vega, Theta & Rho

8. Gamma  Delta (  ) measures the change in portfolio value as the underlier’s price S changes (~speed).  Gamma (  ) measures the rate of change in portfolio value as S changes (~acceleration).

9. Meaning of Gamma Gamma is small  If Gamma is small (abs.), small changes in S will not affect much Delta (and your portfolio value), so there is less need to take immediate rebalancing action. Gamma is large  If Gamma is large, small changes in S will affect Delta (and your portfolio value) significantly, so there is a stronger need to take immediate rebalancing action.

10. Using Gamma  During small periods of time t 2 -t 1  Portfolio = ½   (S 2 -S 1 ) 2 Example: If you do not rebalance and the underlier price drops from $52 to $50, the change of value in a Delta-Neutral Portfolio is approximately = ½   (S 2 -S 1 ) 2 = 0.5 * (-10,000) * (52-50) 2 = -$20,000 ~

11. How to Calculate Gamma  Gamma = N’(d1) S  t  N’(d1) = e –(d1) 2 /2  (2  )  d1 as in Black Scholes Strike Stock price S Gamma

12. Gamma-Neutral Portfolio  More stable than a delta neutral-only.  Cannot use the stock to reach Gamma neutrality because the stock has Gamma = 0 1)  portfolio <> 0 2)  portfolio +  x qty x = 0 3) qty x = -  portfolio /  x  Warning: Acquiring qty x will disturb Delta neutrality. You will need to rebalance.

13. Delta Gamma Delta It’s a strategy, not a sorority.  Find out what to acquire to achieve Delta neutrality.  Find out what to acquire to achieve Gamma neutrality.  Find out what to acquire to re-achieve Delta neutrality. Stock is ideal because it will not affect Gamma.

14. More Dark Horses  Simultaneous Delta Gamma  Conditional Gamma  Extreme transaction costs minimization Come and see me – not on the last day!

15. Theta, Vega, and Rho Conceptually similar to Delta  Theta = change in portfolio value when time changes  Vega = change in portfolio value when the volatility changes  Rho = change in portfolio value when the rate of interest changes

16. Financial Information Management WINIT What Is New In Technology?

17. Financial Information Management Homework Spartan Trader

19. Your Opinion Matters  Name  A couple of things that you are learning from the class  Things that you like/that can be improved  Is the class getting you to think on your own?  Concerns about the HT