3 Quick Questions

  1. Longer term options work better in dynamic hedging because they have lower gammas. Why long term options have lower gammas?

  2. Swap can be used a good hedge of interest rate risk but swaption can not. Why not swaption?

  3. The equivalent annual annuity approach assumes continous replacements can and will be made each time the asset’s life end. At first, I thought this is the statement for “Least common mutiple of lives approach”. I guess they share the same description?

Thank you!

  1. Time value decay is less for longer-maturity options. Their price diagrams are closer to straight lines.

  2. Maybe they assume that you cannot close the barn door until you’ve seen the horse run out.

  3. I don’t quite know what you mean, but it does assume that you can replace the assets at the same price whenever you need to.

I forgot where I saw the second one already but I was looking for exactly what you mentioned. Thank you for your help!

You’re welcome.