4.1
Overview
4.1
Overview
This chapter describes one of the major uses of
option pricing theory: risk management. You
will learn how to control the price risk of a stock position or an option
position. In topic 4.2 The Economics of
Re-trading, you will learn about two theoretically equivalent ways to control
risk. The first is by using a
portfolio of securities, and the second is through what is called dynamic
rebalancing. Rebalancing is similar
to creating a synthetic option, and typically it requires fewer securities and
more trading than the first method. We
take advantage of this equivalence in topic
4.3, Delta Hedging.
Finally, we work through an actual risk management exercise in topic 4.4,
Portfolio Insurance Problem.
(C) Copyright 1999, OS
Financial Trading System