Abstract
M.Comm.
ffntroduction
Measuring and evaluating risks are essential in a dynamic derivative market to
minimize risks. The management of risks in the derivative market is complex
due to the non-linear properties of option pricing
Method of study
The a first step of the study analyzed the "greek" derivatives of a single option
contract (e.g. delta, gamma, vega, theta). The next step was to combine and
analyze the derivatives of various option contracts. The study pointed out that
the risk profile can be amended by combining option contracts.
A risk measurement and evaluation model was constructed by creating a table
that will simulate option prices at different time horizons and at different
market prices. The model will also simulate all the derivatives of options in a
table form at different time horizons and at different market prices. The model
finally used the tables to reflect the results graphically.
Findings
The last section of the study was devoted to scenario simulation to identify risks. Firstly the management of the delta was analyzed, and the use of the
gamma to identify delta sensitivity was illustrated. The management of the
vega was addressed next. The study showed that a combination of options can
minimize the risk of vega. The effect of theta or the time value of a option was
illustrated and linked to both gamma and vega.
The study demonstrated that the results of volatile movements in the market
can be simulated by combining the derivatives of options (e.g. add the deltas
of options together), and to stress test the strategy. "What if' scenarios can be
simulated to illustrate the effect on a current position combined with some
amendments.