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day1pnl


Total Posts: 8
Joined: Jun 2017
 
Posted: 2017-10-18 23:08
I've been acquainting myself recently with the standard risks in a synthetic credit correlation book. I know what delta, base correlation risk, recoveries, jtd, and iGamma/sGamma are.

I feel it also adds some value to know cross greeks like "correlation vanna" (i.e. correlation risk vs spread charts) and the likes of how recoveries impact deltas. But there are a lot to choose from. It's very ad hoc at the moment as I have not seen any literature on this, not in the same way at least as its presented for options.

Could someone tell me which cross greeks and higher orders they would look at in a synthetic credit correlation book?

Thanks

Cheng


Total Posts: 2838
Joined: Feb 2005
 
Posted: 2017-10-19 09:24
I would have a look at how changing recoveries impacts your deltas since recoveries are pretty random at the end of the day and not really hedgeable. So you want to have an idea what could go wrong.

Correlation vs something is probably not that helpful since the whole concept is rather an artificial gimmick to tweak your model, not something you observe in the market (imo people think in terms of price, not in terms of correlation, so the latter is just a derivative). Besides that it is model dependent... it might make sense to look at sensitivities but more from a model risk point of view, to get an idea what could go wrong and reserve accordingly.

"He's man, he's a kid / Wanna bang with you / Headbanging man" (Grave Digger, Headbanging Man)

day1pnl


Total Posts: 8
Joined: Jun 2017
 
Posted: 2017-10-28 14:23
thanks, makes sense.
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