Quant Congress USA: BMW options "a recipe for disaster", says Dupire
Naive treatment of interaction between skew and correlation means writers of best-middle-worst options will face huge hedging losses, says top quant
Skew-based products such as best-middle-worst (BMW) options are "a recipe for disaster", because they fail to account for how the variable interacts with correlation, according to a top quantitative analyst.
Speaking at Risk's Quant Congress USA event in New York, Bruno Dupire, head of quantitative research at Bloomberg, said the products are virtually impossible to hedge because the effect of cross-sectional skew overrides any diversification benefit.
BMW options seek to lock-in profits from so
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