taylor approximation

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taylor approximation

Postby madhuri1682 » Sun Nov 04, 2012 2:25 pm

A trader has an option position in crude oil with a delta of 100,000 barrels and gamma of minus 50,000 barrels per dollar move in price. Using the delta-gamma methodology, compute the VAR on this position, assuming the extreme move on crude oil is $2.00 per barrel.
Choose one answer.
a. $100,000
b. $200,000
c. $300,000
d. $400,000
how to use taylor approximation formula?


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Re: taylor approximation

Postby swarnendupathak » Mon Nov 05, 2012 10:21 am

VaR = Delta*Extreme price movement - 0.5*Gamma*Extreme price movement^2
the answer is USD 100000/-.


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Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: taylor approximation

Postby content.pristine » Tue Nov 06, 2012 2:03 pm

Perfect Swarnendu,

This is similar to how a change in yield affects bond prices - considering the duration convexity approximation instead of the full valuation approach. That is another application of Taylor's Approximation.


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