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Exam 16: Dynamic Hedging and Relative Value Trades

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Exam 1: An Introduction to Fixed Income Markets17 Questionsadd course
Exam 2: Basics of Fixed Income Securities20 Questionsadd course
Exam 3: Basics of Interest Rate Risk Management17 Questionsadd course
Exam 4: Basic Refinements in Interest Rate Risk Management18 Questionsadd course
Exam 5: Interest Rate Derivatives: Forwards and Swaps15 Questionsadd course
Exam 6: Interest Rate Derivatives: Futures and Options15 Questionsadd course
Exam 7: Inflation, Monetary Policy, and the Federal Funds Rate15 Questionsadd course
Exam 8: Basics of Residential Mortgage Backed Securities21 Questionsadd course
Exam 9: One Step Binomial Trees15 Questionsadd course
Exam 10: Multi-Step Binomial Trees15 Questionsadd course
Exam 11: Risk Neutral Trees and Derivative Pricing18 Questionsadd course
Exam 12: American Options19 Questionsadd course
Exam 13: Monte Carlo Simulations on Trees18 Questionsadd course
Exam 14: Interest Rate Models in Continuous Time15 Questionsadd course
Exam 15: No Arbitrage and the Pricing of Interest Rate Securities17 Questionsadd course
Exam 16: Dynamic Hedging and Relative Value Trades13 Questionsadd course
Exam 17: Dynamic Hedging and Relative Value Trades18 Questionsadd course
Exam 18: The Risk and Return of Interest Rate Securities11 Questionsadd course
Exam 19: No Arbitrage Models and Standard Derivatives20 Questionsadd course
Exam 20: The Market Model for Standard Derivatives19 Questionsadd course
Exam 21: Forward Risk Neutral Pricing and the Libor Market Model14 Questionsadd course
Exam 22: Multifactor Models16 Questionsadd course
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What use does the Replicating Portfolio have?

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It is a useful tool to hedge securities and to take a view on whether a security may be mispriced and, thus, an arbitrage opportunity exists.

What is a Replicating Portfolio?

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How close should the value of the Replicating Portfolio be to the asset if we increase the rebalancing frequency?

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The higher the rebalancing frequency the tighter the relationship between the replicating portfolio and the asset.

What is the theta-gamma relation?

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Question 4

What means to rebalance the Replicating Portfolio?

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Question 5

What general principal do you follow, once an arbitrage opportunity is found?

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Question 6

What is a relative value trade?

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Question 7

What instrument is used to hedge derivative exposure?

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Question 8

Given the Fundamental PDE, explain the theta-gamma relation.

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Question 9

What is theta?

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Question 10

What steps do we follow for a relative value trade?

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Question 11

What is gamma?

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Question 12

Can you think of any reason why rebalancing doesn't always occur at extermely short frequencies (instantenous) in the real world?

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Question 13
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