Dynamic Hedging

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.

Introduction Dynamic Hedging 1

Part 1 Markets, Instruments, People
1 Introduction to the Instruments 9

2 The Generalized Option 38
3 Market Making and Market Using 48
4. Liquidity and Liquidity Holes 68
5 Arbitrage and the Arbitrageurs 80

6 Volatility and Correlation 88

Part II Measuring Option Risks
7 Adapting Black-Scholes-Merton: The Delta 115

8 Gamma and Shadow Gamma 132
9 Vega and the Volatility Surface 147

10 Theta and Minor Greeks 167
11 The Greeks and Their Behavior 191
12 Fungibility, Convergence, and Stacking 208
13 Some Wrinkles of Option Markets 222
14 Bucketing and Topography 229
15 Beware the Distribution 238
16 Option Trading Concepts 256
Part III Trading and Hedging Exotic Options
17 Binary Options: European Style 273
18 Binary Options: American Style 295
19 Barrier Options (I) 312
20 Barrier Options (II) 347
21 Compound, Choosers, and Higher Order Options 376
22 Multiasset Options 383
23 Minor Exotics: Lookback and Asian Options 403
Part IV Modules
Module A Brownian Motion on a Spreadsheet, a Tutorial 415
Module B Risk Neutrality Explained 426
Module C Numeraire Relativity and the Two-Country Paradox 431
Module D Correlation Triangles: A Graphical Case Study 438
Module E The Value-at-Risk 445
Module F Probabilistic Rankings in Arbitrage 453
Module G Option Pricing 459
Notes 479
Bibliography 490
Index 499