Dynamic Hedging and Volatility Trading 3. The effectiveness of the strategy hinges on the starting assumptions regarding the dynamics of the FX spot rate. If the assumptions are met in the real world, in the sense that they correctly describe the basic features and behaviour of the market, then it can be argued that the theoretical results hold and the profits and losses originated by the strategy exactly match those arising from a position in the contingent claim. In this chapter we present a general framework 31 to examine the possible sources of profits and losses when a dynamic trading strategy is implemented and the starting assumptions do not fully hold. We will extend the range of possible financial instruments entering into the trading strategy, by including not only the FX spot rate and the domestic deposit but other actively traded contingent claims i.
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FX Options and Smile Risk
It is a valuable collection of key ideas concerning the FX smile surface and hedging of first generation exotics. I am very please Antonio took time to share his intuitive insights. Strongly recommended. Attention is given to a wide range of topics, ranging a wide spectrum between theory and practice, from market quoting conventions to volatility surfaces, change of measure techniques, dynamic arbitrage-free models, hedging and risk analysis.
Fx Options and Smile Risk
FX Options and Smile Risk by Antonio Castagna