Dynamic Hedging: Managing Vanilla and Exotic Options

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John Wiley & Sons, Jan 14, 1997 - Business & Economics - 528 pages
Destined 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.
 

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Contents

Introduction Dynamic Hedging
1
Introduction to the Instruments
9
Order of the Options
45
Commoditized and Nonstandard Products
51
Market Making and the Price for Immediacy
57
Monkeys on a Typewriter
64
Liquidity and Risk Management
70
Portfolio Insurance
75
Static Straight Bucketing
229
The Tails
238
169
267
European Binary Options
273
American Single Binary Options
295
Barrier Options
312
Technique
344
238
370

Mechanical versus Behavioral Stability
81
Arbitrage and the Variance of Returns
87
Introducing Filtering
95
The Parkinson Number and the Variance Ratio Method
101
The Delta
115
Delta as a Measure for Risk
121
Simple Gamma
132
Vega and Modified Vega
147
Theta and the Modified Theta
167
The Greeks and Their Behavior
191
Ddeltadvol Stability Ratio
200
Fungibility Convergence and Stacking
208
Stacking Techniques
217
Sticky Strikes
223
256
379
Lookback and Asian Options
403
PART IV
413
Module B Risk Neutrality Explained
426
A Graphical Case Study
438
Module E The ValueatRisk
445
Module F Probabilistic Rankings in Arbitrage
453
Module G Option Pricing
459
Notes
479
Bibliography
490
273
499
376
500
Copyright

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About the author (1997)

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.

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