option p & l gentleman :
the erms system , as you know , has an excellent capability for
decomposing option p & l into the following components :
new deals
curve shift
gamma
vega
theta
rho
drift
2 nd order adjustments
what i dont understand is the gamma component which is reported in dollars .
the unit of measure suggests that incremental changes in a contract position
is being associated with specific prices . these prices are the effective buy
or sell prices associated with the dynamic delta position .
stated differently , the standard taylor expansion has incorporated a price
variable in such a way as to convert the unit of measure from gamma ' s
standard contract count to total gamma dolalrs . this is something i dont
understand . to date , inquiries to the risk management accounting group has
further revealed that the gamma component of p & l is not well understood .
this is what concerns me : bridgeline has 2 books with option exposures ( nymex
and gas daily ) . both books dynamically hedged its positions during
yesterdays large price move and , through anticipitory hedging in advance or
during the large price move , secured sufficient coverage to neutralize
expected changes in delta . however , our p & l from our underlying position did
not offset our gamma p & l . consequently , i have to ask why ? im hoping that a
brief look at the why gamma dollars are calculated may reveal something which
will better guide our hedging decisions .
any help is appreciated