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Portfolio sensitivity to changes in the maximum and the maximum drawdown

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  • Libor Pospisil
  • Jan Vecer

Abstract

In this article, we define new 'Greeks' for financial derivatives: sensitivities to the running maximum and the running maximum drawdown of an underlying asset. Some types of portfolios, such as the net asset value of a hedge fund or performance fees, are sensitive to these parameters. In order to illustrate the concept of the new 'Greeks', we derive probabilistic representations of sensitivities for two classes of financial contracts: forwards on the maximum drawdown and lookback options. These results allow us to interpret the delta-hedge of the contracts in a novel way.

Suggested Citation

  • Libor Pospisil & Jan Vecer, 2010. "Portfolio sensitivity to changes in the maximum and the maximum drawdown," Quantitative Finance, Taylor & Francis Journals, vol. 10(6), pages 617-627.
    • Handle: RePEc:taf:quantf:v:10:y:2010:i:6:p:617-627
    DOI: 10.1080/14697680903008751
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    References listed on IDEAS

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    1. David G. Hobson, 1998. "Robust hedging of the lookback option," Finance and Stochastics, Springer, vol. 2(4), pages 329-347.
    2. Goldman, M Barry & Sosin, Howard B & Gatto, Mary Ann, 1979. "Path Dependent Options: "Buy at the Low, Sell at the High"," Journal of Finance, American Finance Association, vol. 34(5), pages 1111-1127, December.
    3. Eberlein, Ernst & Papapantoleon, Antonis, 2005. "Equivalence of floating and fixed strike Asian and lookback options," Stochastic Processes and their Applications, Elsevier, vol. 115(1), pages 31-40, January.
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