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Risk Management and Hedge Funds

gamma and is frequently labeled with the Greek letter
. Changes in the
delta are important to risk measurement because they mean that the risk
characteristics of the portfolio can change in rising or falling markets. Of-
ten, these changes warrant changes in the composition of the portfolio or
of hedges.
Theta--Sensitivity to Time to Expiration
The value of the underlying secu-
rity moves around randomly. In contrast, the time to expiration trends
steadily down over time. Theta measures the impact of passing time on the
value of a derivative. Long positions nearly always lose value under the
scenario of no change in price or volatility.
QUESTIONS AND PROBLEMS
11.1 What are some of the advantages of using risk control models that
do not rely on probability?
11.2 What advantages do probability-based risk control models have
over other techniques that do not rely on probability?
11.3 Why is risk management not equivalent to risk elimination or risk
minimization?
11.4 What is distinctive about bonds that allows the risk manager to use
tools such as duration and convexity that may be of limited value
for other types of assets?
11.5 Why is the full price or dirty price as high as or higher than the price
conventionally used in securities trading?
11.6 Why is duration a better measure of bond risk than average life?
11.7 For many years, the Argentine peso was pegged to the U.S. dollar.
Describe some of the advantages and disadvantages of using the
U.S. dollar as a hedge, even if your real exposure is in pesos.
11.8 Why might beta provide an improper hedge for long and short eq-
uity positions?
11.9 You are long a call on a futures contract that is correctly delta
hedged versus the underlying future. You don't plan to adjust the
hedge before expiration. Explain how this position resembles an op-
tion straddle.
11.10 Explain why the upper limit for the delta of an option is generally
1.00.
11.11 You calculated the trade weights for a two-year note versus a five-
year note. Your calculations suggest that you should sell $2 mil-
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