Book Image

F# for Quantitative Finance

By : Johan Astborg
Book Image

F# for Quantitative Finance

By: Johan Astborg

Overview of this book

F# is a functional programming language that allows you to write simple code for complex problems. Currently, it is most commonly used in the financial sector. Quantitative finance makes heavy use of mathematics to model various parts of finance in the real world. If you are interested in using F# for your day-to-day work or research in quantitative finance, this book is a must-have.This book will cover everything you need to know about using functional programming for quantitative finance. Using a functional programming language will enable you to concentrate more on the problem itself rather than implementation details. Tutorials and snippets are summarized into an automated trading system throughout the book.This book will introduce you to F#, using Visual Studio, and provide examples with functional programming and finance combined. The book also covers topics such as downloading, visualizing and calculating statistics from data. F# is a first class programming language for the financial domain.
Table of Contents (17 chapters)
F# for Quantitative Finance
Credits
About the Author
About the Reviewers
www.PacktPub.com
Preface
Index

Delta hedging using Black-Scholes


A delta neutral portfolio is constructed by an option and the underlying instrument. The portfolio will, in theory, be immune against small changes in the underlying price. When talking about delta hedging, the hedge ratio of a derivative is used to define the amount of underlying price needed for each option. Delta hedging is the trading strategy that maintains a delta neutral portfolio for small changes in the underlying price.

Briefly, let's look at how to do this in practice. Suppose we have N derivatives. This needs to be hedged to protect against price movements. We then need to buy the underlying stock to create the hedge. The whole procedure can be described in three steps:

  1. N derivatives need to be delta hedged

  2. Buy underlying stock to protect derivatives

  3. Rebalance hedge position on a regular basis

To determine how many stocks we need, we use the delta of the option, Δ. This tells us how much the option price changes for a change in price of the underlying...