Risk Management and Hedging

Model: Value-at-Risk (VaR) calculations

Description: Statement of maximum loss over a given time horizon, the statement being made with a defined level of confidence.

Input: Time Horizon, Confidence Level, Portfolio Composition, Price Dynamics and corresponding parameters

Output: Evaluation of required risk measures

Model: Control Variates for simulated VaR measurements

Description: Improved accuracy in simulation estimates of VaR by using control variates.

Input: Time Horizon, Confidence Level, Portfolio Composition, Price Dynamics and corresponding parameters and Control Variate

Output: More accurate VaR results

Model: Cornish-Fisher expansion

Description: Approximation method for VaR calculations

Input: Time Horizon, Confidence Level, Portfolio Composition, Price Dynamics and corresponding parameters

Output: Approximate valuation of required risk measures

Model: Delta hedging

Description: Hedging technique that nullifies the risk of a portfolio of options with respect to small changes in the prices of underlying assets.

Input: Price Dynamics and corresponding parameters for portfolio components

Output: Hedging Portfolio

Model: Delta-Gamma hedging

Description: Hedging technique that nullifies the risk of a portfolio of options with respect to small changes in the prices of underlying assets with an in-built correction for the inability to continuously trade the underliers and thereby execute a pure delta hedge.

Input: Price Dynamics and corresponding parameters for portfolio components

Output: Hedging Portfolio

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