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Enron Mail |
Brad,
I was extreamly busy yesterday. Sorry for answing your question till now. Although I am not exactly sure how the system handle gamma, this is what I= =20 think the system is doing: Curve shift =3D today's price - yesterady's price P/L due to curve shift =3D today's market value using today's price curve (= with=20 everything esle the same as yesterday's) - yesterday's market value using= =20 yesterday's price curve. So P/L due to curve shift contains both delta and gamma and higher order=20 terms. We then use theoretical gamma (meaning option model gamma: 0.5*gamma * (pri= ce=20 change)2 ) for gamma contribution and?define delta =3D curve shift - theore= tical gamma.??Therefore, the gamma may not be very accurate to explain the = delta change, ?especially when you have big price change due to higher orde= r contribution. ??Let me know your thoughts on this.???Best wishes,??Zimin?= ???????? Brad Horn 10/12/2000 07:11 AM??To: Zimin Lu/HOU/E= CT@ECT, Stinson Gibner/HOU/ECT@ECT?cc: Vince J Kaminski/HOU/ECT@ECT, Vladim= ir Gorny/HOU/ECT@ECT, Robert ?Shiring/HOU/ECT@ECT, Jay Knoblauh/HOU/ECT@ECT= ?Subject: Option P&L??Gentleman:? The ERMS system, as you know, has= an excellent capability for ?decomposing option P&L into the following com= ponents:??new deals?curve shift?gamma?vega?theta?rho?drift?2nd order adjust= ments??What i dont understand is the gamma component which is reported in d= ollars. ?The unit of measure suggests that incremental changes in a contra= ct position ?is being associated with specific prices. These prices are th= e effective buy ?or sell prices associated with the dynamic delta position.= ??Stated differently, the standard taylor expansion has incorporated a pr= ice ?variable in such a way as to convert the unit of measure from gamma's = ?standard contract count to total gamma dolalrs. This is something I dont = ?understand. To date, inquiries to the risk management accounting group ha= s ?further revealed that the gamma component of P&L is not well understood.= ??This is what concerns me: Bridgeline has 2 books with option exposures = (NYMEX ?and Gas Daily). Both books dynamically hedged its positions during= ?yesterdays large price move and, through anticipitory hedging in advance = or ?during the large price move, secured sufficient coverage to neutralize = ?expected changes in delta. However, our P&L from our underlying position = did ?not offset our gamma P&L. Consequently, I have to ask WHY? Im hoping= that a ?brief look at the why gamma dollars are calculated may reveal some= thing which ?will better guide our hedging decisions.??Any help is apprecia= ted??
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