Frequently Asked Questions In Quantitative Finance

46 Frequently Asked Questions In Quantitative Finance

the index falls by 10% XYZ will fall by 12%. The crash

coefficient therefore allows a portfolio with many under-

lyings to be interpreted during a crash as a portfolio

on a single underlying, the index. We therefore consider

the worst case of

δ=F(δS 1 ,...,δSN)=F(κ 1 xS 1 ,...,κNxSN)

as our measure of downside risk.

Again Platinum Hedging can be applied when we have

many underlyings. We must consider the worst case of

δ=F(κ 1 xS 1 ,...,κNxSN)+

∑M

k= 1

λkFk(κ 1 xS 1 ,...,κNxSN)

−

∑M

k= 1

|λk|Ck,

whereFis the original portfolio and theFksare the

available hedging contracts.

CrashMetrics is very robust because

• it does not use unstable parameters such as
  volatilities or correlations


• it does not rely on probabilities, instead considers
  worst cases

CrashMetrics is a good risk tool because

• it is very simple and fast to implement


• it can be used to optimize portfolio insurance against
  market crashes

CrashMetrics is used for

• analyzing derivatives portfolios under the threat of a
  crash


• optimizing portfolio insurance