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pj


Total Posts: 3448
Joined: Jun 2004
 
Posted: 2019-03-05 13:50
Hi,

There is a structurer asking me to convert the
Greeks (delta, gamma, theta) into percentage format
and refusing to explain what does that mean.

Googling and books didn't help.

Moreover the provided example numbers for delta
are positive in classical (as he terms them dollar)
and negative in percentage term. Therefore dividing the
delta by the notional is out.

So what is he talking about?

The older I grow, the more I distrust the familiar doctrine that age brings wisdom Henry L. Mencken

Maggette


Total Posts: 1106
Joined: Jun 2007
 
Posted: 2019-03-05 14:11
Could you post the example he send you?

Embarrassing, but just rule out the stupid stuff:

If you have a Delta 0.5....he doesn't expect you to send 50? Like in 50%?

Ich kam hierher und sah dich und deine Leute lächeln, und sagte mir: Maggette, scheiss auf den small talk, lass lieber deine Fäuste sprechen...

pj


Total Posts: 3448
Joined: Jun 2004
 
Posted: 2019-03-05 14:29
Don't think it will be of any help,
but here there are the numbers.

PV -1,268,596.63
DELTA 1,749.50
DELTA_PERCENTAGE -0.222667258
GAMMA -11.2967495
VEGA -19,426,472.30
THETA 1,369.59
RHO 23,370,269.94

> If you have a Delta 0.5....he doesn't expect you to send 50? Like in 50%?

Sigh, there is a sign change, and the delta/delta_percentage makes
no sense to me.

I have repeatedly asked for the definition. Head against Wall

The older I grow, the more I distrust the familiar doctrine that age brings wisdom Henry L. Mencken

Maggette


Total Posts: 1106
Joined: Jun 2007
 
Posted: 2019-03-05 14:44
Sorry, makes no sense to me either.

Last shot in the dark...change in delta from time t_k-1 to time t_k?
Edit: so basically not solveablewith the information in the example?

Sorry, No idea.

Ich kam hierher und sah dich und deine Leute lächeln, und sagte mir: Maggette, scheiss auf den small talk, lass lieber deine Fäuste sprechen...

ronin


Total Posts: 443
Joined: May 2006
 
Posted: 2019-03-05 14:48
It would be percentage of notional. The number in the termsheet.

Delta percentage could mean 0.22 basis points (modulo sign), in which case it is ~ 78 mln in notional. So 23 million rho and 20 million vega can make sense, depending on the maturity. Is this like a 30y trade?

But seriously, who hedges the delta to the fraction of a basis point and lets vega and rho run to tens of millions?



"There is a SIX am?" -- Arthur

pj


Total Posts: 3448
Joined: Jun 2004
 
Posted: 2019-03-05 14:48
> Sorry, No idea.
you feel my pain

< EDIT > It is an equity barrier. Dead

The older I grow, the more I distrust the familiar doctrine that age brings wisdom Henry L. Mencken

deeds


Total Posts: 425
Joined: Dec 2008
 
Posted: 2019-03-05 15:26
Perhaps something from Haug, e.g. p 56, VegaP, GammaP as percentage change?

pj


Total Posts: 3448
Joined: Jun 2004
 
Posted: 2019-03-05 15:42
It may be the notional (it may be negative)...
Proposed that.
Waiting him to respond.

The older I grow, the more I distrust the familiar doctrine that age brings wisdom Henry L. Mencken

ronin


Total Posts: 443
Joined: May 2006
 
Posted: 2019-03-05 22:50
@pj,

Something I learned in my second month on an exotics desk (a long time ago).

Always, always make people email you their questions and requests.

Just the simple act of organising their thoughts enough to put them in an email eliminates 99% of stupid requests. And the last 1% is much less stupid.

"There is a SIX am?" -- Arthur

chiral3
Founding Member

Total Posts: 5076
Joined: Mar 2004
 
Posted: 2019-03-06 03:36
+1 for ronin.

All I can think of is he may have a term sheet from an institutional client with $delta, .... i.e., $ change given, say, a 1% change in underlying; so %delta ~= $delta*100/S0.

Nonius is Satoshi Nakamoto. 物の哀れ

Strange


Total Posts: 1540
Joined: Jun 2004
 
Posted: 2019-03-06 03:48
For an equity barrier, it makes sense that people want to see premium/delta/gamma/vega etc in percent of notional. It's a standard way of thinking about it. Just take whatever dollar greeks you got and divide them by the notional.

PS. some of the greeks conventions are confusing and that's where traders and quants frequently differ - most common are gamma (lots of people like to see change of delta per 1 percent move) and vega (again, it's more convenient to think in terms of pnl per IV change by 1 vol).

I don't interest myself in 'why?'. I think more often in terms of 'when?'...sometimes 'where?'. And always how much?'

pj


Total Posts: 3448
Joined: Jun 2004
 
Posted: 2019-03-06 10:10
> Always, always make people email you their questions and requests.

The most important thing and I have learned it the hard way. Smiley

@Strange
> it makes sense that people want to see premium/delta/gamma/vega etc in percent of notional.
I apologize for a stupid question. But why? Why does it make sense normalizing the Greeks this way?

The older I grow, the more I distrust the familiar doctrine that age brings wisdom Henry L. Mencken

ronin


Total Posts: 443
Joined: May 2006
 
Posted: 2019-03-06 10:45
> I have learned it the heard way.

We all did... Wink


> Why does it make sense normalizing the Greeks this way?

The buyer is looking at the entire structured note. He put up say 78 million, and he is thinking "what's my 78 million returning if the underlying goes up 1%"? So 50 delta has a clear meaning to him- it means he is making 0.5% for each 1% move in the underlying.

The trading desk is using the same language to minimise the operational risk of always having to translate back and forth when communicating with the client.

"There is a SIX am?" -- Arthur

Strange


Total Posts: 1540
Joined: Jun 2004
 
Posted: 2019-03-06 16:41
> Why does it make sense normalizing the Greeks this way?
Primarily because people want to compare apples to apples. In this case, if I live in a "notional-expressed" world where the premiums and strikes are expressed in percent, it makes sense to see the risk parameters in the same terms. E.g. I'd think something like
* I am paying 125 bps for this Jun 100%/85% barrier
* It has delta of -10% and gamma of -5%
* So if the market moves down 5%, I'll make ~10 bps (in reality, it's closer to zero)
* Why the f*ck would I buy this sh*t?

I don't interest myself in 'why?'. I think more often in terms of 'when?'...sometimes 'where?'. And always how much?'

pj


Total Posts: 3448
Joined: Jun 2004
 
Posted: 2019-03-06 17:22
Thank you very much!
>* Why the f*ck would I buy this sh*t?
Last q, would you sell it?

The older I grow, the more I distrust the familiar doctrine that age brings wisdom Henry L. Mencken

Strange


Total Posts: 1540
Joined: Jun 2004
 
Posted: 2019-03-06 18:24
I was giving a hypothetical example. For choice, personally I'd be a buyer, not a seller - especially given how skew has richened up.

I don't interest myself in 'why?'. I think more often in terms of 'when?'...sometimes 'where?'. And always how much?'

ronin


Total Posts: 443
Joined: May 2006
 
Posted: 2019-03-06 22:26
> Last q, would you sell it?

Depends on the margin, of course...

"There is a SIX am?" -- Arthur
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