It provides a real-world methodology for managing portfolios containing any nonlinear security. It presents risks from the vantage point of the option market maker and arbitrage operator. As a larger share of market exposure cannot be properly captured by mathematical models, noted option arbitrageur Nassim Taleb uniquely covers both on-model and off-model derivatives risks. Dynamic Hedging is an indispensable and definitive reference for market makers, academics, finance students, risk managers, and regulators.
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If the barrier breach happens, the payment is made either at expiration delayed settlement or shortly after the barrier breach immediate settlement. One touches are closely related to knockout options and represent the rebate that the equivalent knockout option pays in the event of knockout. Even though the contractual provisions of one touches look simple, their pricing is far from trivial. Typically, the barrier is set far from the current underlying price and much depends on how the underlying volatility changes between now and the time the underlying asset gets close to the barrier.
For that reason, understanding the underlying volatility surface is essential. In particular one touch pricing is highly sensitive to the volatility skew.
One touches are especially liquid in the world of foreign exchange. Together with vanilla options and knockouts, they represent the market data to which the volatility surface is calibrated on real-time basis. The calibration is done for combinations of standard strikes and tenors, separately for each underlying currency cross.
Some trading desks are known to pay specific attention to one touches when calibrating risk reversals As the next step, the volatility surface is interpolated for non-standard strikes and tenors, still separately for each cross.
Finally, the volatility surfaces are used for pricing more complex and truly exotic derivative products. One touches are traded over the counter OTC. If you are a small hedge fund, most prime brokers will allow you to trade one touches and will do the clearing and back office operations for you.
For the list of top prime brokers please refer to the link below. Exotic Options Trading. Lipton, A. World Scientific. Nelken, I. Clark, I. Heston, S. The Review of Financial Studies 6, Carr, P. Stochastic Skew in Currency Options. Journal of Financial Economics 86, Broadie, M.
Connecting discrete and continuous path-dependent options. Finance and Stochastics 3, Gatheral, J. The Volatility Surface. Taleb, N. Wiley Finance, New York.
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It provides a real-world methodology for managing portfolios containing any nonlinear security. It presents risks from the vantage point of the option market maker and arbitrage operator. As a larger share of market exposure cannot be properly captured by mathematical models, noted option arbitrageur Nassim Taleb uniquely covers both on-model and off-model derivatives risks. The techniques for trading exotic options, including binary, barrier, multiasset, and Asian options, as well as methods to take into account the wrinkles of actual, non-bellshaped distributions. New tools to detect risks, such as higher moment analysis, topography exposure, and nonparametric techniques. The path dependence of all options hedged dynamically. Dynamic Hedging is replete with helpful tools, market anecdotes, at-a-glance risk management rules distilling years of market lore, and important definitions.
Start your review of Dynamic Hedging. Write a review Shelves: non-fiction , finance Do you remember reading The Divine Comedy and getting finally to the part where the two poets apparently on an extended smoke break from their barista jobs in Brooklyn get to the ninth circle of Hell only to think to yourself, "Brutus and Cassius? I mean Judas I totally get, and these guys are distasteful and all, but the inner circle? We may forgive Signor Alighieri for his error, for he was Do you remember reading The Divine Comedy and getting finally to the part where the two poets apparently on an extended smoke break from their barista jobs in Brooklyn get to the ninth circle of Hell only to think to yourself, "Brutus and Cassius? We may forgive Signor Alighieri for his error, for he was born years too early to recognize the ominously darkened visage of Nassim Nicholas Taleb next to the ludicrously grinning mug of Paul Wilmott as they bookend Judas Iscariot for all of eternity. But I digress The thing is that this book is bad.