One of those silly math questions again. We've been struggling on this one. I would appreciate any help.
I need to prove, mathematically, that I can or can not hedge a portfolio with the following greeks: delta-neutral, vega-neutral and rho-neutral. I can use one position on the underlying asset and one call+one put on that same asset with the same strike price and the same time remaining before the strike.
We know it involves a system of 3 linear equations, but we just can't complete it.
Any ideas?
:homestar:
I like cookies.
It's actually something I'm studying for my upcoming actuarial test. Therefore, I don't have a clue.
Quote from: viper37 on April 07, 2011, 03:24:16 PM
One of those silly math questions again. We've been struggling on this one. I would appreciate any help.
I need to prove, mathematically, that I can or can not hedge a portfolio with the following greeks: delta-neutral, vega-neutral and rho-neutral. I can use one position on the underlying asset and one call+one put on that same asset with the same strike price and the same time remaining before the strike.
We know it involves a system of 3 linear equations, but we just can't complete it.
Any ideas?
This is way outside my area of expertise, but if you have three linear equations can you set up a matrix and reduce it? Or is that the problem and you have an irreducible matrix?
Quote from: DGuller on April 07, 2011, 04:13:01 PM
It's actually something I'm studying for my upcoming actuarial test. Therefore, I don't have a clue.
:D
Quote from: Savonarola on April 07, 2011, 04:26:08 PM
This is way outside my area of expertise, but if you have three linear equations can you set up a matrix and reduce it? Or is that the problem and you have an irreducible matrix?
We have equations we can not solve. We have set up an equation with fake numbers in Excel, than used the solver to solve the system wich return "no answer".
Is it because we do not have the right equations to start with, or is it because it's really unsolvable?
It's only 0,5 points, but we would have liked to get it right. In my case, it might just be difference between fail and pass (not that it matters to anything but my ego since I can't keep studying anyway, but my ego is important, and the grades of my friends too ;) )
None of us are math genius, and the teacher... well, he's the kind of the teacher that will give you 0 if you make a small mistake in your development or simply if you use another way to solve the problem but made a mistake getting to your answer. Crazy math guy with 2 minors and 2 master degrees...
I'll post the equations we have tomorrow morning; right now, my monitors are acting cracy and constantly shutting down for "power saving" and I'm tired of pressing the power button every 5min. :mad:
Quote from: viper37 on April 07, 2011, 10:04:52 PM
We have equations we can not solve. We have set up an equation with fake numbers in Excel, than used the solver to solve the system wich return "no answer".
Is it because we do not have the right equations to start with, or is it because it's really unsolvable?
It's only 0,5 points, but we would have liked to get it right. In my case, it might just be difference between fail and pass (not that it matters to anything but my ego since I can't keep studying anyway, but my ego is important, and the grades of my friends too ;) )
None of us are math genius, and the teacher... well, he's the kind of the teacher that will give you 0 if you make a small mistake in your development or simply if you use another way to solve the problem but made a mistake getting to your answer. Crazy math guy with 2 minors and 2 master degrees...
I'll post the equations we have tomorrow morning; right now, my monitors are acting cracy and constantly shutting down for "power saving" and I'm tired of pressing the power button every 5min. :mad:
Okay, you can solve the three linear equations by reducing the formulas until you're solving for one variable and then working backwards until you have all three. I looked through a couple on line tutorials and here is one that explains how to solve a system of three linear three variable equations pretty well. It gives examples and explains why there might not be a solution:
http://www.wtamu.edu/academic/anns/mps/math/mathlab/col_algebra/col_alg_tut50_systhree.htm (http://www.wtamu.edu/academic/anns/mps/math/mathlab/col_algebra/col_alg_tut50_systhree.htm)
Ok, thanks, I'll look at that over the week-end.