How to Manage the Maximum Relative Drawdown
نویسندگان
چکیده
Maximum Relative Drawdown measures the largest percentage drop of the price process on a given time interval. Recently, Maximum Relative Drawdown has become more popular as an alternative measure of risk. In contrast to the Value at Risk measure, it captures the path property of the price process. In this article, we propose a partial differential equation approach to determine the theoretical distribution of the Maximum Relative Drawdown. We also discuss the possibility of constructing an option contract that would insure the event that the Maximum Relative Drawdown exceeds a certain fixed percentage. We call these contracts Crash Options. We compute the theoretical prices and hedging strategies for the Crash Option.
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