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Longer can actually be better because over longer periods of time the
distribution will regain normality. The problem of non continuous pricing
(gaps) which blows up delta hedging ..... will go away. The challenge is to
have enough capital to ride out the occasional periods when it doesn't work. Do
it over enough trades over a long enough time and the correlation will be good.
You don't die in the long run .. you die because of the short term move. Orange
County, LTCM and others died in the short run, but their positions would have in
fact been profitable if held longer.
Robert Hodge wrote:
> I only have one worry about the OTC derivative markets: the big wholesale
> players have been taking on new positions from their customers since trading
> began in these markets. Many/most of the instruments they have on their
> books have maturities of at least 1 year and OFTEN 10+ years. As long as
> their business increases they get to "book" some new trade (bid-ask) profits
> and perhaps release the rest over the life of the trade. But how many of
> them can say how much it will really cost them to hedge their longer term
> positions? Most delta hedging is done via the futures markets so they are
> almost certainly mis-matching the maturity of their delta hedges with their
> underlying positions. The constant requirement to roll-over their positions
> and adjust their size must be quite a weight of friction on their long term
> profits.
>
> I expect for most participants the average age of the positions on their
> books is now increasing steadily (at least in some sectors). There must be a
> point where these businesses find out whether their theoretical profits will
> actually cover the long term cost of hedging.
>
> Any comments?
>
> R
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