Dynamic Hedging: Managing Vanilla and Exotic OptionsDestined to become a market classic, Dynamic Hedging is the only practical reference in exotic options hedgingand arbitrage for professional traders and money managers Watch the professionals. From central banks to brokerages to multinationals, institutional investors are flocking to a new generation of exotic and complex options contracts and derivatives. But the promise of ever larger profits also creates the potential for catastrophic trading losses. Now more than ever, the key to trading derivatives lies in implementing preventive risk management techniques that plan for and avoid these appalling downturns. Unlike other books that offer risk management for corporate treasurers, Dynamic Hedging targets the real-world needs of professional traders and money managers. Written by a leading options trader and derivatives risk advisor to global banks and exchanges, this book provides a practical, real-world methodology for monitoring and managing all the risks associated with portfolio management. Nassim Nicholas Taleb is the founder of Empirica Capital LLC, a hedge fund operator, and a fellow at the Courant Institute of Mathematical Sciences of New York University. He has held a variety of senior derivative trading positions in New York and London and worked as an independent floor trader in Chicago. Dr. Taleb was inducted in February 2001 in the Derivatives Strategy Hall of Fame. He received an MBA from the Wharton School and a Ph.D. from University Paris-Dauphine. |
Contents
Introduction Dynamic Hedging | 1 |
Introduction to the Instruments | 9 |
Order of the Options | 45 |
Liquidity and Liquidity Holes | 68 |
Arbitrage and the Arbitrageurs | 80 |
Module | 87 |
Volatility and Correlation | 89 |
PART II | 102 |
European Style | 273 |
American Style | 295 |
Barrier Options | 312 |
167 | 338 |
Barrier Options II | 347 |
238 | 370 |
Compound Choosers and Higher Order Options | 377 |
256 | 379 |
The Delta | 115 |
Delta and the Barrier Options | 126 |
Gamma and Shadow Gamma | 132 |
Vega and the Volatility Surface | 147 |
Theta and Minor Greeks | 167 |
The Greeks and Their Behavior | 191 |
147 | 194 |
Fungibility Convergence and Stacking | 208 |
Some Wrinkles of Option Markets | 222 |
Bucketing and Topography | 229 |
Beware the Distribution | 238 |
Option Trading Concepts | 256 |
PART III | 271 |
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Common terms and phrases
3-month arbitrage Asian options Asset Price Figure Assume at-the-money barrier options bets binary options Black-Scholes Black-Scholes-Merton Brownian motion bucket call spread cash changes Chapter compound option computed convergence convexity correlation currency curve delta neutral derivative difference distribution dollar double bet drift dynamic hedging effect Eurodollar example exotic options expected expiration exposure face value forward future Greeks hedger implied volatility instruments interest rates knock-in knock-out call knock-out option liquidity long gamma lookback market maker market moves matrix method Module negative number of paths numeraire operator option price option traders Option Wizard out-of-the-money out-of-the-money options parameters path dependent payoff portfolio position premium probability profits put-call parity rally ratio replication reverse knock-out Risk Management Rule risk reversal risk-neutral sell sensitivity shows skew spot stochastic strike price Table term structure theta tion trader needs trigger underlying asset USD-DEM USD-FRF vanilla option variance vega