The definitive book on options trading and risk management "If pricing is a science and hedging is an art, Taleb is a virtuoso." Some securities cannot be hedged with a static position.For example, the change in the price of an option is not linear with (in a constant proportion to) the change in the value of the underlying asset. Dynamic hedging can be very difficult and potentially costly; some market player might wish to avoid it and enter into some transaction that offers protection without the need for continuous correction. Of course, as is the case with everything in finance, anything that offers peace of mind comes with a price: a form of static hedging is in general more expensive than a dynamic one. In limited cases static replication is sufficient, notably in put–call parity.
dynamic hedging strategy: A hedging technique which seeks to limit an investment's exposure to delta and gamma by adjusting the hedge as the underlying security changes (hence, "dynamic"). Dynamic Currency Hedging (DCH) is a systematic trend-following hedge solution with strategic value-add It is difficult to pick the direction of currency moves correctly over an extended timeframe, but DCH seeks to do this for you – and has the track record to prove it … Dynamic replication is fundamental to the Black–Scholes model of derivatives pricing, which assumes that derivatives can be replicated by portfolios of other securities, and thus their prices determined.See explication under Rational pricing #The replicating portfolio.. Static hedges can be much more complex than the simple example above: for example, when statically hedging a barrier option with vanilla options a number of vanilla options may be required to hedge one barrier option. Dynamic Hedging is a foreign exchange management strategy that provides a flexible solution to protect investments from exchange rate risks as it allows businesses and individuals to readapt their hedging positions to evolving market conditions. Dynamic Hedging in Incomplete Markets: A Simple Solution Abstract Despite much work on hedging in incomplete markets, the literature still lacks tractable dynamic hedges in plausible environments. A dynamic hedge is one that needs to be adjusted as the price (and sometimes other characteristics) of the portfolio or security it is hedging changes.. The strategy is frequently used by financial professionals working with derivatives. Dynamic Hedging is an indispensable and definitive reference for market makers, academics, finance students, risk managers, and regulators.
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