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CariocaBruce
Posts: 2
Joined: December 7th, 2007, 1:56 am

What is hedging?

December 7th, 2007, 3:09 pm

So is diversification a type of hedging? Or is hedging a specific type of diversification? Or are hedging and diversification different things?I tend to think of hedging as something you do to protect against a specific known risk (I know that interest rates can change, but I want the credit spread, so I'll buy this type of credit, but my purchases will include a hedge to remove the interest rate risk).I tend to think of diversification as something you do to protect against unknown risks, or risks that cannot be specifically hedged (should I be worried about earthquakes in California, riots in Basra, the CEO being hit by a truck, or something else I haven't thought of - so better have lots of different things in my portfolio).I'm sure there is a relationship between hedging and diversification, but I'm having trouble specifying it... any thoughts here?
Last edited by CariocaBruce on December 6th, 2007, 11:00 pm, edited 1 time in total.
 
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Gmike2000
Posts: 801
Joined: September 25th, 2003, 9:49 pm

What is hedging?

December 15th, 2007, 9:41 pm

From a trading point of view, hedging and speculating are one and the same. You can never fully hedge an exotic options book. Even if you could, you wouldn't do it. As a trader, you are forced to weigh certain risks versus others. What you end up doing is leaving the "good" risks, and selling the "bad" risks, depending on your view of the market. Some call it hedging, but you might as well call it speculation. There is really no difference.
 
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yeahmoon
Posts: 68
Joined: April 22nd, 2008, 1:11 am

What is hedging?

April 10th, 2015, 1:39 am

Last edited by yeahmoon on April 9th, 2015, 10:00 pm, edited 1 time in total.
 
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yeahmoon
Posts: 68
Joined: April 22nd, 2008, 1:11 am

What is hedging?

April 10th, 2015, 1:39 am

I am looking for papers/books on hedging jump risk too.If you know some, please let me know!Thanks QuoteOriginally posted by: fashionmarinahican anyone explain me simply what i should do if i need to hedge a long position in a vanilla call option if i use a Lévy process model (VG,NIG...)?if i've understand the control of delta (and gamma?) hedge only the diffusion part of risk while because (with Lèvy processes) markets are incomplete i need to hedge the jump risk too.to do that if i've understand i should to do vega-hedging with every strike out-of-the-money or anything of similar.can anyone explain me the theory of hedging with lèvy processes and what i should to do to implement it.what are authors/papers about it?it's very important for me, thanks.
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