Dynamic Hedging: Managing Vanilla and Exotic Options

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John Wiley & Sons, Jan 14, 1997 - Business & Economics - 506 pages
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Dynamic Hedging is the definitive source on derivatives risk. 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. The only book about derivatives risk written by an experienced trader with theoretical training, it remolds option theory to fit the practitioner's environment. 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 author discusses, in plain English, vital issues, including:

  • The generalized option, which encompasses all instruments with convex payoff, including a trader's potential bonus.
  • 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.
  • Market dynamics viewed from the practitioner's vantage point, including liquidity holes, portfolio insurance, squeezes, fat tails, volatility surface, GARCH, curve evolution, static option replication, correlation instability, Pareto-Levy, regime shifts, autocorrelation of price changes, and the severe flaws in the value at risk method.
  • 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. The book contains modules in which the fundamental mathematics of derivatives, such as the Brownian motion, Ito's lemma, the numeraire paradox, the Girsanov change of measure, and the Feynman-Kac solution are presented in intuitive practitioner's language.

Dynamic Hedging is an indispensable and definitive reference for market makers, academics, finance students, risk managers, and regulators.

The definitive book on options trading and risk management

"If pricing is a science and hedging is an art, Taleb is a virtuoso." —Bruno Dupire, Head of Swaps and Options Research, Paribas Capital Markets

"This is not merely the best book on how options trade, it is the only book." —Stan Jonas, Managing Director, FIMAT-Société Générale

"Dynamic Hedging bridges the gap between what the best traders know and what the best scholars can prove." —William Margrabe, President, The William Margrabe Group, Inc.

"The most comprehensive, insightful, intuitive work on the subject. It is instrumental for both beginning and experienced traders."—

"A tour de force. That rare find, a book of great practical and theoretical value. Taleb successfully bridges the gap between the academic and the real world. Interesting, provocative, well written. Each chapter worth a fortune to any current or prospective derivatives trader."—Victor Niederhoffer, Chairman, Niederhoffer Investments

  

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Dynamic hedging: managing vanilla and exotic options

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If the dot-com bubble was an age of unabashed risk-taking, the prolonged hangover from that binge has fostered a period of risk aversion; this snappily titled volume is a detailed text of tools that ... Read full review

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for traders read
聪聪推荐:作者是很有经验的quant trader,现在纽约,同时在麻省教书。是我现在精读的一本书,因为比较不数学,所以放在睡觉之前看,非常实用,但毕竟是给trader看的,太过实用了。。。。大家不要急着买!第二版就快出来了

Contents

Introduction Dynamic Hedging
1
Introduction to the Instruments
9
The Generalized Option
38
Market Making and Market Using
48
Liquidity and Liquidity Holes
68
Arbitrage and the Arbitrageurs
80
Volatility and Correlation
88
Part II
109
Options
290
Barrier Options I
312
Technique
344
Double Barrier Options
362
Compound Choosers and Higher Order Options
376
Multiasset Options
383
Linear Combinations
390
Lookback and Asian Options
403

The Delta
115
Gamma and Shadow Gamma
132
Vega and the Volatility Surf ace
147
Theta and Minor Greeks
167
The Greeks and Their Behavior
191
Fungibility Convergence and Stacking
208
Some Wrinkles of Option Markets
222
Bucketing and Topography
229
Beware the Distribution
238
Option Trading Concepts
256
Trading and Hedging Exotic Options
271
Module A Brownian Motion on a Spreadsheet a Tutorial
415
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
Index
499
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.