Tag archives for Hedging

Feedback: What is the Effect of Hedging Options on the Underlying?

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More and more investors insist on guarantees on the investments. Theses investments are often created using options or dynamic strategies like CPPI. Recently, these strategies were made available in secularized form: Leveraged Exchange Traded Funds   (LETF) and Exchange Traded Notes (ETN). Also, life insurance instruments often include guarantees on funds like Variable Annuities. In this […]

What is the Difference Between Risk-Neutral Valuation and Real-World Valuation?

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In option pricing, two technical terms often create confusion. One term is “risk-neutral” and the other “real-word”. You hear these terms in the context of option pricing, backtesting, risk management and hedging. In this article I try to clarify the terminology. Background First, we start with “risk-neutral”. The term risk-neutral refers to option pricing: The […]

Pricing and Hedging 101

One of the main methods required in option pricing is the Black-Scholes framework. This theory is very appealing and somewhat convincing as we will see in the following.