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To produce The 2 solutions comparable you should think of investing/borrowing $PnL_1$ at rate $r$ to make sure that it stays in the method until $t_2,.$ At the moment your
So how does delta-hedging frequency just impact the smoothness and variance of PnL if we can easily Obviously see it has an effect on PnL itself in this example?
Nivel Egres: From your viewpoint of gamma pnl, The one thing that matters would be the transform inside your asset rate. Frequency is irrelevant - you are able to rebalance at different time durations or when delta exceeds a threshold or a number of other matters - it remains to be an approximation of continuous integral along with your anticipated P&L might be precisely the same.
How is this accurate nevertheless? Delta-hedging frequency provides a immediate impact on your PnL, and not just the smoothness of it.
Which means if $sigma$ modifications as the underlying variations you could possibly account for that 2nd-order influence with extra sensitivities (vanna precisely), but People consequences are frequently Substantially smaller sized and will be insignificant determined by your objective.
If there is autocorrelation inside the intraday return method that you select to hedge at (which can consequently have an effect on day-to-day annualised volatility), then your P/L is unquestionably impacted by your decision of hedging interval.
$begingroup$ It can be without a doubt. It is really In particular fascinating in a very portfolio in which you could be hedging some challenges and retaining Many others. $endgroup$
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So why develop a PnL report. As I realize, The main reason for creating a PnL report is to point out the split of profit/decline amongst different parameters that effect bond rate. Is the fact proper? $endgroup$
For reasonable amounts of spreads and interest costs, we can easily approximate the CS01 Along with the time and energy to maturity. This could permit you to determine A fast approximation on the PnL using the data you might have.
$ Inside the "work case" you liquidate the portfolio at $t_1$ realising its PnL (let me simplify the notation a little)
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Now, in the above explanation, we assumed the stock was undertaking on some continuous vol in any way times in time. Let's say the intraday vol diverges drastically with the each day vol? Ie: Being an EXAGGERATION, say you evaluate some inventory and you simply estimate in the earlier ten working day closing charges the inventory is doing over a 1 vol. Pretty much closes in which it opened every day. You then commit to seem nearer and evaluate vol in 30 minute increments as opposed to by everyday closing rates. Once you search intraday/30 min increments, the thing is the inventory moves quite a bit, but determined by closing charges performs even now on the 1 vol.