ARBLab Solutions

ARBLab helps to answer to questions about holding period risk-adjusted returns for trading, sales, and risk- and senior-management, such as:

Market Makers/Prop Traders Examples

1) Can I improve my rebalance strategy by examining the performance of my historical P&L, and determine how the strategy can be altered (in terms of measurable market conditions) to improve my P&L, or even to improve my risk-adjusted return on capital?

2) How will our current trading and risk strategy (including limits, mandates, etc) perform if there is a large swings in the markets with large increases in volatility, accounting for our rebalances and other activities?  What other strategies can I use that provide a better risk-adjusted return?

3) Under what market conditions would a volatility arbitrage be "best"?  Which "model" most accurately reflects market behaviour, do any arbitrage profits exist, and if so under what market conditions?

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Structurers/Sales Staff Examples

1) We need to issue a complex structure with tricky/exotic derivatives components, and the theory says the price should be "X", but what will our real holding period hedging costs be, possibly accounting for frequent rebalances in not so liquid markets, and with correlation effects?  Are there better strategies? How can I adjust my upfront price to adjust for these costs and any risks in the rebalance process?

2) How can I show my client that her portfolio has different risks with different assumptions about the forward market, and that she is not covered for some of those conditions, and  would benefit by transacting on a variety of structures with us.

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Management/Compliance/Risk Examples

1) Do we even know the risk adjusted return on capital for our options desk?  Does it meet our company's return (risk) requirements, and if not can it be achieved? How do we make capital and risk allocation decisions at the desk level? 

2) We need to prove to our regulators that this fancy new product we are launching has, in reality, a lower risk factor then BIS/CAD/ etc. assumptions admit, and we need to show this to them on holding period basis with forward and backward looking scenarios and stress testing illustrating the performance of our hedge strategy.

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