MANAGING OPTIONS RISK FOR EXOTIC （外来风险管理选项）.pdfVIP

MANAGING OPTIONS RISK FOR EXOTIC OPTIONS An exotic derivative is one for which no liquid market exists. As a general rule, the only liquid options are European-exercise calls and puts, including interest rate caps, floors, and European swaptions. Since exotic derivatives can rarely be marked-to-market based on publicly available prices at which they can be bought and sold, they usually have to be marked based on some hedging strategy which involves combinations of dynamic hedging using forwards and European-exercise options. The general approach we will be following is one of building up techniques for marking-to-market and calculating risk on less liquid instruments by designing hedging strategies involving more liquid instruments. A less liquid instrument is marked based on the cost of executing the hedging strategy, and risk is then calculated by estimating the degree of uncertainty around this cost. We will do this in successive stages - at each stage, instruments for which we developed marks at previous stages will be considered available for use in creating hedging strategies to mark other instruments. However, we must be careful to realize that any risks due to uncertainty of how to mark an instrument will be inherited by instruments which it is then used to mark. So we will often be faced (once again) with tradeoffs between basis risk (employing a hedging strategy which uses more liquid instruments but which leaves a lot of room for uncertainty) and liquidity risk (employ a hedging strategy which does not introduce much uncertainty by using less liquid instruments). As one example of how the stages will work: USD/JPY FX • We will use more liquid forwards to create a hedge for less liquid forwards on USD/JPY FX and estimate the resulting basis risk. • We will use both less liquid and more liquid forwards on USD/JPY FX along with more liquid European-exercise options on USD/JPY FX to create a hedge for le