this is a question from the 2021 Boston mock exam. The question is: Calculate the percentage contribution to total portfolio risk for each of the three funds held in Kibble’s US equity portfolio
I understand the guideline answer, but how come that:
when I square the SD for a given fund, it does not equal to the covariance of that fund with itself (which, I believe, should as the covariance with itself is just variance, right)?
how come the formula for contribution of a given asset / fund to variance, which equals to: Covariance of given fund / asset to portfolio * weight of that asset / fund; does not produce the correct answer?
Shouldn’t the Call strikes for both call options be higher than the put strike in a bullish seagull spread? otherwise it will only have one shoulder…
i think the correct construction should be short 490put, long 510call, short 530call, but it’s not one of the choices
Found my way to this thread by searching , wondering "how come the formula for contribution of a given asset / fund to variance, which equals to: Covariance of given fund / asset to portfolio * weight of that asset / fund; does not produce the correct answer?"
And the answer us … it makes no sense! This is frustrating …
You sure about the formulation of this Long Seagull? I don’t know if I’m missing something, but this would be one helluva xpensive hedge and I doubt this is a purpose of seagull.
“write an ATM call at 1.3550 and use the proceeds to buy an OTM put option at 1.3500 and an OTM call option at 1.3600. Note that in this seagull structure, the “body” is now a short option position, not a long position as in the previous example, and the “wings” are the long position. Hence, it is a long seagull spread.”
It makes more sense now, but I still think this is not a classic long seagull I would expect (bullish → with call spread + selling OTM put; or bearish → with put spread + selling OTM call). It looks to me more like short seagull position.
As I see it from this example, this strategy would be profitable only in case you would see exch. rate move either above 1.3600 or below 1.3500, and certainly to move away from 1.3550. Plus, your ATM premium received would have to be pretty damn high (of course, depending on the strike and premia of OTM long positions)
Still not sure though, as I think I might not see the woods for the tree.
Its not and that was my issue with this question. I was only familiar with what is in the curriculum.
This is how they describe a short seagull spread.
Short seagull = Long ATM put + Short OTM put + Short OTM call
So the long and short puts would be a bear put spread(Debit spread)
“As with the names for other option strategies based on winged creatures, the “seagull” indicates an option structure with at least three individual options, and in which the options at the most distant strikes—the wings—are on the opposite side of the market from the middle strike(s)—the body. For example, if the current spot price is 1.3550, a seagull could be constructed by going long an ATM put at 1.3550 (the middle strike is the “body”), short an OTM put at 1.3500, and short an OTM call at 1.3600 (the latter two options are the “wings”). Because the options in the “wings” are being written (sold) this is called a short seagull position. The risk/return profile of this structure gives full downside protection from 1.3550 to 1.3500 (at which point the short put position neutralizes the hedge) and participation in the upside potential in spot rate movements to 1.3600 (the strike level for the short call option).”
hm… this seems to me to be a classic bearish seagull, with put spread + short OTM call.
Really don’t know, but I know couple of guys who might offer better answer
Edit: As I said, I couldn’t see the forest… If you go long the ATM put (you bought the body), and go short OTM call and put (short the wings). Short wings = you are short seagull. → and this is bearish seagull
On the other hand there is bullish seagull, which is a long seagull, that involves bull call spread + selling OTM put.
I think that’s it… its becoming totally messy in my head! Sorry for confusion.
The OP’s question is about bullish seagull (long position)
