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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-Society GARCH

 "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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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

정보제공 :

CONTENTS
Introduction : Dynamic Hedging = 1
  Principles of Real World Dynamic Hedging = 1
  General Risk Management = 3
PART Ⅰ MARKETS, INSTRUMENTS, PEOPLE
  1 Introduction to the Instruments = 9
    Derivatives = 9
    Synthetic Securities = 12
    Time-Dependent Linear Derivatives = 13
    Noncontingent Time-Dependent Nonlinear Derivatives = 16
    Options and Other Contingent Claims = 16
      Simple Options = 18
    Hard and Soft Optionality = 20
    Basic Rules of Options Equivalence = 20
      Mirror Image Rule = 22
    American Options, Early Exercise, and Other Headaches(Advanced Topic) = 24
      Soft American Options = 24
      Hard American Options = 25
      A Brief Warning about Early Exercise Tests = 27
    Forwards, Futures, and Forward-Forwards(Advanced Topic) = 29
      Credit = 30
      Marks-to-Market Differences = 30
      The Correlation between the Future and the Financing(Advanced Issue) = 31
      Forward-Forward = 32
    Core Risk Management : Distinction between Primary and Secondary Risks = 32
      Applying the Framework to Specific Instruments = 35
  2 The Generalized Option = 38
    Step 1. The Homogeneity of the Structure = 38
    Step 2. The Type of Payoff : Continuous and Discontinuous = 41
    Step 3. Barriers = 43
    Step 4. Dimension of the Structure and the Number of Assets = 43
    Step 5. Order of the Options = 45
    Step 6. Path Dependence = 46
  3 Market Making and Market Using = 48
    Book Runners versus Price Takers = 48
    Commoditized and Nonstandard Products = 50
      Trading Risks in Commoditized Products = 51
      Profitability = 53
    Proprietary Departments = 54
    Tacit Rules in Market Making = 56
    Market Making and the Price for Immediacy = 57
    Market Making and Autocorrelation of Price Changes = 58
    Market Making and the Illusion of Profitability = 58
    Adverse Selection, Signaling, and the Risk Management of Market Makers = 60
    Value Trading versus the Greater Fool Theory = 62
    Monkeys on a Typewriter = 64
      The Statistical Value of Track Records = 64
      More Modern Methods of Monitoring Traders = 65
      The Fair Dice and the Dubins-Savage Optimal Strategy = 65
      The ArcSine Law of the P／L = 66
  4 Liquidity and Liquidity Holes = 68
    Liquidity = 68
    Liquidity Holes = 69
    Liquidity and Risk Management = 70
    Stop Orders and the Path of Illiquidity = 70
    Barrier Options and the Liquidity Vacuum = 72
    One-Way Liquidity Traps = 73
    Holes, Black-Scholes, and the Ills of Memory = 73
    Limits and Market Failures = 74
    Reverse Slippage = 74
    Liquidity and Triple Witching Hour = 75
    Portfolio Insurance = 75
    Liquidity and Option Pricing = 77
  5 Arbitrage and the Arbitrageurs = 80
    A Trader's Definition = 80
    Mechanical versus Behavioral Stability = 81
    The Deterministic Relationships = 82
    Passive Arbitrage = 83
    An Absorbing Barrier Called the "Squeeze" = 84
    Duration of the Arbitrage = 84
    Arbitrage and the Accounting Systems = 85
    Other Nonmarket Forms of Arbitrage = 86
    Arbitrage and the Variance of Returns = 87
  6 Volatility and Correlation = 88
    Calculating Historical Volatility and Correlation = 92
      Centering around the Mean = 92
    Introducing Filtering = 95
    There Is No Such Thing as Constant Volatility and Correlation = 97
    The Parkinson Number and the Variance Ratio Method = 101
PART Ⅱ MEASURING OPTION RISKS
  The Real World and the Black-Scholes-Merton Assumptions = 109
    Black-Scholes-Merton as an Almost Nonparametric Pricing System = 109
  7 Adapting Black-Scholes-Merton : The Delta = 115
    Characteristics of a Delta = 116
    The Continuous Time Delta Is Not Always a Hedge Ratio = 116
    Delta as a Measure for Risk = 121
    Confusion : Delta by the Cash or by the Forward = 123
    Delta for Linear Instruments = 123
      Delta for a Forward = 123
      Delta for a Forward-Forward = 125
      Delta for a Future = 125
    Delta and the Barrier Options = 126
    Delta and the Bucketing = 127
    Delta in the Value at Risk = 127
    Delta, Volatility, and Extreme Volatility = 127
  8 Gamma and Shadow Gamma = 132
    Simple Gamma = 132
    Gamma Imperfections for a Book = 133
    Correction for the Gamma of the Back Month = 136
      First Adjustment = 137
      Second Adjustment = 138
    Shadow Gamma = 138
    Shadow Gamma and the Skew = 142
    GARCH Gamma = 142
    Advanced Shadow Gamma = 142
    Case Study in Shadow Gamma : The Syldavian Elections = 145
  9 Vega and the Volatility Surface = 147
    Vega and Modified Vega = 147
      Vega and the Gamma = 149
      The Modified Vega = 150
      How to Compute the Simple Weightings = 151
      Advanced Method : The Covariance Bucket Vega = 153
    Forward Implied Volatilities = 154
      Computing Forward Implied Volatility = 154
      Multifactor Vega = 158
      Volatility Surface = 164
    The Method of Squares for Risk Management = 164
  10 Theta and Minor Greeks = 167
    Theta and the Modified Theta = 167
      Modifying the Theta = 167
      Theta for a Bet = 169
      Theta, Interest Carry, and Self-Financing Strategies = 169
      Shadow Theta = 170
      Weakness of the Theta Measure = 171
    Minor Greeks = 171
      Rho, Modified Rho = 171
      Omega(Option Duration) = 174
      Alpha = 178
    Table of Greeks = 181
      Stealth and Health = 182
      Convexity, Modified Convexity = 183
      The "Double Bubble" = 190
  11 The Greeks and Their Behavior = 191
    The Bleed : Gamma and Delta Bleed(Holding Volatility Constant) = 191
      Bleed with Changes in Volatility = 195
      Going into the Expiration of a Vanilla Option = 196
    Ddeltadvol(Stability Ratio) = 200
      Test 1 of Stability = 200
      Test 2 of Stability : The Asymptotic Vega Test = 201
    Moments of an Option Position = 202
    Ignoring Higher Greeks : The Lock Delta = 204
  12 Fungibility, Convergence, and Stacking = 208
    Fungibility = 208
      Ranking of Fungibility = 209
      Fungibility and the Term Structure of Prices : The Cash-and-Carry Line = 210
      Fungibility and Option Arbitrage = 212
      Changes in the Rules of the Game = 212
    Convergence = 213
      Mapping Convergence = 215
      Convergence and Convexity = 216
      Levels of Convergence Trading = 216
      Volatility and Convergence = 216
      Convergence and Biased Assets = 216
    Stacking Techniques = 217
      Other Stacking Applications = 220
  13 Some Wrinkles of Option Markets = 222
    Expiration Pin Risks = 222
    Sticky Strikes = 223
    Market Barriers = 224
      A Currency Band : Is It a Barrier? = 225
      The Absent Barrier = 226
    What Flat Means = 226
      Primary and Secondary Exposures = 228
  14 Bucketing and Topography = 229
    Static Straight Bucketing = 229
      American and Path-Dependent Options = 231
      Advanced Topic : The Forward or "Forward-Forward" Bucket = 231
    Topography = 232
      Strike Topography(or Static Topography) = 233
      Dynamic Topography(Local Volatility Exposure) = 235
      Barrier Payoff Topography = 237
  15 Beware the Distribution = 238
    The Tails = 238
      Random Volatility = 238
      Histograms from the Markets = 242
    The Skew and Biased Assets = 245
      Biased Assets = 248
      Nonparallel Accounting = 249
      Value Linked to Price = 250
      Currencies as Assets = 250
      Reverse Assets = 251
      Volatility Regimes = 251
      Correlation between Interest Rates and Carry = 252
    More Advanced Put-Call Parity Rules = 252
  16 Option Trading Concepts = 256
    Initiation to Volatility Trading : Vega versus Gamma = 260
    Soft versus Hard Deltas = 262
    Volatility Betting = 263
      Higher Moment Bets = 264
    Case Study : Path Dependence of a Regular Option = 265
    Simple Case Study : The "Worst Case" Scenario = 270
PART Ⅲ TRADING AND HEDGING EXOTIC OPTIONS
  17 Binary Options : European Style = 273
    European Binary Options = 273
      Hedging with a Vanilla = 275
      Definition of the Bet : Forward and Spot Bets = 278
    Pricing with the Skew = 279
      A Formal Pricing on the Skew = 281
      The Skew Paradox = 282
      Difference between the Binary and the Delta : The Delta Paradox Revisited = 284
      First Hedging Consequences = 286
      The Delta Is a Dirac Delta = 286
      Gamma for a Bet = 287
    Conclusion : Statistical Trading versus Dynamic Hedging = 289
    Case Study in Binary Packages - Contingent Premium Options = 290
      Recommended Use : Potential Devaluations = 291
    Case Study : The Betspreads = 292
      Advanced Case Study : Multiasset Bets = 294
  18 Binary Options : American Style = 295
    American Single Binary Options = 295
      Hedging an American Binary : Fooled by the Greeks = 298
    Case Study : National Vega Bank = 298
      The Ravages of Time = 299
      Understanding the Vega Convexity = 303
      Trading Methods = 305
      Case Study : At-Settlement American Binary Options = 306
      Other Greeks = 307
    American Double Binary Options = 307
      Vegas of the Double Binary = 308
      Other Applications of American Barriers = 309
      Credit Risk = 311
  19 Barrier Options(Ⅰ) = 312
    Barrier Options(Regular) = 312
      Knock-Out Options = 312
      Knock-In Options = 317
      Effects of Volatility = 319
      Adding the Drift : Complexity of the Forward Line = 321
      Risk Reversals = 323
      Put／Call Symmetry and the Hedging of Barrier Options = 323
      Barrier Decomposition under Skew Environments = 331
      The Reflection Principle = 335
      Girsanov = 339
      Effect of Time on Knock-Out Options = 339
      First Exit Time and Its Risk-Neutral Expectation = 340
      Issues in Pricing Barrier Options = 343
      The Single Volatility Fudge = 343
      A More Accurate Method : The Dupire-Derman-Kani Technique = 344
      Additional Pricing Complexity : The Variance Ratios = 345
    Exercise : Adding the Puts = 346
  20 Barrier Options(Ⅱ) = 347
    Reverse Barrier Options = 347
      Reverse Knock-Out Options = 347
      Case Study : The Knock-Out Box = 348
      Hedging Reverse Knock-Outs : A Graphical Case Study = 356
    Double Barrier Options = 362
      Rebate = 363
      Exercise : Adding the Knock-In = 363
      Alternative Barrier Options = 363
      The Exploding Option = 364
      Capped Index Option = 365
    Reading a Risk Management Report = 368
      Gaps and Gap Reports = 374
  21 Compound, Choosers, and Higher Order Options = 376
    Vega Convexity : The Costs of Dynamic Hedging = 378
    Uses of Compound Options : Hedging Barrier Vega = 379
    Chooser Options = 380
    A Few Applications of the Higher Order Options = 382
  22 Multiasset Options = 383
    Choice between Assets : Rainbow Options = 384
      Correlated and Uncorrelated Greeks = 387
    Linear Combinations = 390
      Basket Options = 391
      Lognormality = 391
      Correlation Issues = 392
    Composite Underlying Securities = 395
    Quantitative Case Study : Indexed Notes = 395
      Background = 396
      Terms of the Note = 396
      Where Is the Underlying? = 397
      Triangular Decomposition = 398
  23 Minor Exotics : Lookback and Asian Options = 403
    Lookback and Ladder Options = 403
      The Rollover Option = 404
    A Footnote on Basket Options : Asian Options = 408
PART Ⅳ MODULES
  Module A Brownian Motion on a Spreadsheet, a Tutorial = 415
    The Classical One-Asset Random Walk = 415
    Some Questions = 417
    A Two-Asset Random Walk : An Introduction to the Effects of Correlation = 420
    Extension : A Three-Asset Random Walk = 424
  Module B Risk Neutrality Explained = 426
    Step 1. Probabilistic Fairness, the "Fair Dice" and the Skew = 426
    Step 2. Adding the Real World : The Risk-Neutral Argument = 427
      The Drift = 427
  Module C Numeraire Relativity and the Two-Country Paradox = 431
    Extension : The Two-Country Paradox = 433
      Conclusion = 435
      Mathematical Note = 436
      Conclusion = 437
  Module D Correlation Triangles : A Graphical Case Study = 438
    Correlation Triangle Rule = 441
    Calculating an Implied Correlation Curve = 444
  Module E The Value-at-Risk = 445
    Simplified Examples = 446
      Example 1. No Diversification = 447
      Example 2. A Cross-Position = 447
      Example 3. Two Possible Trades = 448
  Module F Probabilistic Rankings in Arbitrage = 453
    Ranking of Securities = 453
      European Option Rules = 453
      Calendar Rules = 454
      Barrier and Digital Rules = 454
      Correlation Rules = 455
    Correlation Convexity Rules = 457
    General Convexity Rules = 458
  Module G Option Pricing = 459
    Ito's Lemma Explained = 459
      Ito's Lemma for Two Assets = 462
    Black-Scholes Equation = 463
      The Risk-Neutral Argument = 463
    Stochastic Volatility Model = 464
    Multiasset Options = 466
      Rainbow Options = 466
      Outperformance Options = 467
      Spread Options = 467
    Compound and Chooser Order Options = 467
      Compound Options = 468
      Chooser Options = 468
    Barrier Options = 468
      The Reflection Principle = 469
      Girsanov's Theorem = 469
      Pricing Barriers = 470
    Numerical Stochastic Integration : A Sample = 477
      A Mathematic Program = 477
Notes = 479
Bibliography = 490
Index = 499