As the title says, could somebody please explain why the Taylor series approximation overstates a long call/put option VaR and vice versa for the short option position?
I'm revising through the chapters and realised I forgot how this is meant to work!
The Taylor Series lets us approximate a smooth function with a polynomial. Here we apply it to both an option position (where the second term captures gamma) and a bond position (where the second term captures convexity)
David's XLS is here: https://trtl.bz/2rlVj7H
Thanks a lot for video lectures they are much inspiring Still I was little bit confused with all these different names duration, modified duration, Macauly duration,.. etc...I will shortly examine mine view of this and kindly ask you to comment ( but without laughing:))
Last one from me until the next weekend.
With regard to the Taylor series of approximation, are we supposed to be able to calculate that on the exam? I am conscious that it involves cumbersome calculations, etc...