Part 4 - Risk And Risk Management

Question 1

What can reduce Omega Ratio

Answer 1

Higher volatility
Higher kurtosis
lower skewness
Increase target return

Question 2

What is Capital at Risk for Managed Futures

Answer 2

The total loss that would be incurred should each position hit its stop loss price level on that day.

Does not account for long and short positions and therefore overstates risk

Question 3

Three key observations on Delta Hedging

Answer 3

• Delta hedging is not a directional bet
• Efficiently priced stocks produce trading strategies with an NPV of zero
• Delta hedging is partly a bet on volatility

Question 4

Observations on rebalancing delta-neutral option portfolios

Answer 4

• Infrequent re-hedging is a bet on positive autocorrelation
• Frequent re-hedging is a bet on negative autocorrelation
• Re-hedging is more effective for short-dated options that are near the money