Portfolio Hedging – Managing Delta and Vega Risk

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Kathrein Privatbank Aktiengesellschaft

25 Wipplingerstraße

1010 Wien

Austria

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Dear CFA Society Austria Members,

As many of you know, we host an annual competition to determine the best paper submitted by student at Austrian universities on the topic "Investment" in a broad sense. The winners of this prestigious award are asked to present the paper to our members.

The abstract below provides an overview of what to expect:

This thesis analyzes the immunization methods of portfolios of interest rate deriva-tives. Hedging procedures based on the risk exposure minimization and on the Principal component analysis (PCA) are elaborated in more detail.
I focus on the Interest rate risk management, in particular on Delta and Vega risk optimization for interest rate swaps, caps and floors.


Principal component analysis is applied to the term structures of interest rates and volatilities to reduce the space dimensionality of highly correlated market instru-ments. Dynamics of the volatility surface are examined from the perspective of the PCA.


Portfolio hedge methods are presented as NP-hard combinatorial problems with binary variables. I introduce an efficient heuristic algorithm of the local minimum search. Benchmarking portfolios described in this thesis are generated by relaxing the binary conditions.


Historical simulation, Monte Carlo simulation and Stress Tests are evaluated for all hedging methods.

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Kathrein Privatbank Aktiengesellschaft

25 Wipplingerstraße

1010 Wien

Austria

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