Log Contract Ln(S) [Loxx]

2022년 10월 6일

A log contract, first introduced by Neuberger (1994) and Neuberger (1996), is not strictly an option. It is, however, an important building block in volatility derivatives (see Chapter 6 as well as Demeterfi, Derman, Kamal, and Zou, 1999). The payoff from a log contract at maturity T is simply the natural logarithm of the underlying asset divided by the strike price, ln(S/ X). The payoff is thus nonlinear and has many similarities with options. The value of this contract is (via "The Complete Guide to Option Pricing Formulas")

L = e^(-r * T) * (log(S/X) + (b-v^2/2)*T)

The delta of a log contract is

delta = (e^(-r*T) / S)

and the gamma is

gamma = (e^(-r*T) / S^2)

An even simpler version of the log contract is when the payoff simply is ln(S). The payoff is clearly still nonlinear in the underlying asset. It follows that the value of this contract is:

L = e^(-r * T) * (log(S) + (b-v^2/2)*T)

The theta/time decay of a log contract is

theta = - 1/T * v^2

and its exposure to the stock price, delta, is

delta = - 2/T * 1/S

This basically tells you that you need to be long stocks to be delta- neutral at any time. Moreover, the gamma is

gamma = 2 / (T * S^2)

b=r options on non-dividend paying stock
b=r-q options on stock or index paying a dividend yield of q
b=0 options on futures
b=r-rf currency options (where rf is the rate in the second currency)

Inputs
S = Stock price.
T = Time to expiration in years.
r = Risk-free rate
c = Cost of Carry
V = volatility of the underlying asset price
cnd1(x) = Cumulative Normal Distribution
nd(x) = Standard Normal Density Function
convertingToCCRate(r, cmp ) = Rate compounder

Numerical Greeks or Greeks by Finite Difference
Analytical Greeks are the standard approach to estimating Delta, Gamma etc... That is what we typically use when we can derive from closed form solutions. Normally, these are well-defined and available in text books. Previously, we relied on closed form solutions for the call or put formulae differentiated with respect to the Black Scholes parameters. When Greeks formulae are difficult to develop or tease out, we can alternatively employ numerical Greeks - sometimes referred to finite difference approximations. A key advantage of numerical Greeks relates to their estimation independent of deriving mathematical Greeks. This could be important when we examine American options where there may not technically exist an exact closed form solution that is straightforward to work with. (via VinegarHill FinanceLabs)

Things to know
Only works on the daily timeframe and for the current source price.
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2022년 10월 6일

릴리즈 노트

Removed unused inputs

2월 28일

릴리즈 노트

fixed error