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28 Sep 10
12:22
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Date Joined:
21 Mar 09
Would appreciate any advice from the shrewdies on here, I'm trying to do some initial research into gamma risk and its effect on the pricing of FX options. How important is it in their pricing? What times is it more important than others? Any pointers appreciated. Thanks.
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gamma risk is an issue for sure.The major risk however is kryptonite.Especially if you superman.[smiley:crazy]
Greek wise, wrt gamma, its the volatility input into the pricing model thats important. gamma sensitivity, all things being equal for an atm option increases as the time to expiry decreases with a compensating increase in the theta. If you are pricing on a high vol underlyer, say aud-usd, the gamma per equivalent unit notional will be higher than in a lower vol pair like eur-chf. thats a function of the implied volatility.
In terms of how implied vol runs are generated, days where there are heavily data/event laden will be attributed a higher daily vol, while weekends will be attributed close to zero, but not zero as announcements may be made that impact the underlyer in a gappy way. FOMC, elections, G10 weekends, Non Farms etc all contribute to a hike in implied vol in the expectation that actuals may follow. Its the cost of insuring against an increased chance of an outlyer data point- A random tuesday with no data events is likely to afford a lower expected daily and therefor implied vol. Systematic over or underperforance of actual vol will impact future implied pricing (in the short term)- That being said, in my experience in g3 over long periods, vol and therefore gamma, is typically well priced. no systematic overpricing or underpricing wrt realised volatility albeit that there can be major over/underperformance on a daily basis.
I dont know if that helps. if you can give a more specific area you are looking, or trying to prove/disprove, I can suggest more specific areas to focus on.
In terms of how implied vol runs are generated, days where there are heavily data/event laden will be attributed a higher daily vol, while weekends will be attributed close to zero, but not zero as announcements may be made that impact the underlyer in a gappy way. FOMC, elections, G10 weekends, Non Farms etc all contribute to a hike in implied vol in the expectation that actuals may follow. Its the cost of insuring against an increased chance of an outlyer data point- A random tuesday with no data events is likely to afford a lower expected daily and therefor implied vol. Systematic over or underperforance of actual vol will impact future implied pricing (in the short term)- That being said, in my experience in g3 over long periods, vol and therefore gamma, is typically well priced. no systematic overpricing or underpricing wrt realised volatility albeit that there can be major over/underperformance on a daily basis.
I dont know if that helps. if you can give a more specific area you are looking, or trying to prove/disprove, I can suggest more specific areas to focus on.
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