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The concept of stress levels embedded in S&P 500 options are defined and illustrated with explicit constructions. The particular example of a stress function used is MINMAXVAR. Seven joint laws for the top 50 stocks in the index are considered. The first time changes a Gaussian one factor...
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Complex positions on multiple underliers are hedged using the options surface of all underliers. Hedging objectives follow Cherny and Madan (2010) by minimizing ask prices for which post hedge residual risks are acceptable at prespecified levels. It is shown that such hedges require one to use a...
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