Sunday, February 27, 2011

real time risk - option market maker

Core component is the valuation engine. Each vol surface gets rebuilt every 10 minutes. Positions are re-valued every minute on average.

I believe option position valuations change more often because spot moves more often than implied volatility.

(Similarly, in Sprite of Baml Stirt, the FX spot moves more often than fwd points. It also moves more often than interest rate market data, including IR futures prices.)



I was told it's hard for any eq vol market maker to survive without a real time pricer. When client calls for a quote, it's problematic to rely on a 2-hour stale vol surface.

Re-pricing in 2 areas --
1) position mark-to-market (most important)
2) outgoing quote/RFQ pricing

I feel these 2 areas are related. If you are a market maker in an index (stoxx for eg), then your own position will influence your outgoing quotes. I guess the Reason is -- position means market-risk, and position means hedging. Everyone needs to hedge, esp. a market maker.

For volatility instruments, delta-hedging must be adjusted constantly.

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http://www.linkedin.com/in/tanbin