"There are challenges in terms of the measurement of VAR for what are known as nonlinear derivatives, where things like gamma and vega are important dimensions of the risk"
- John C. Hull
About this Quote
This quote by John C. Hull is referring to the problem of measuring Value at Risk (VAR) for derivatives that are nonlinear. Nonlinear derivatives are financial instruments that have a reward that is not proportional to the underlying possession's cost. Examples of nonlinear derivatives consist of options, futures, and swaps. These derivatives have 2 important danger measurements, gamma and vega, which are difficult to determine. Gamma determines the rate of change in the delta of an option, while vega steps the level of sensitivity of an option's cost to changes in volatility. As these risk dimensions are difficult to determine, it is challenging to accurately determine the VAR for nonlinear derivatives.
This quote is written / told by John C. Hull somewhere between October 31, 1939 and today. He was a famous Professor from USA.
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