Adding Derivatives to Absolute Return Attribution

This article develops a methodology to incorporate the return to derivative positions into the recently developed absolute return attribution framework of Cooper and Li.  This innovation greatly broadens the scope of use for this attribution model.  The positions are integrated into the attribution primarily by breaking their return into effects due to movements in the underlying equities and arbitrage effects.  For derivative positions held longer, a time effect is also introduced.   The exposures are expressed in terms of option pricing quantities commonly known as the Greeks, and their equivalent in the futures market.

Adding Derivatives to Absolute Return Attribution

Ricky Cooper, Ph.D., Illinois Institute of Technology
Tingting Li, Illinois Institute of Technology