I have a question regarding hedge:What hinds behind that concept ?Is it simply trying to look at the first derivative of the instrument with respect to the underlying?What are the consequences in terms of models?ThanksRB

Hi Remibi, The Greeks are derivatives of the value function with respect to model and contractparameters, not just the underlying.The idea is to know how sensitive is your payoff to changes in parameters like: spot, vol, rates, etc. And they are very important information for traders .Anton

The general concept of hedging is to buy or sell risky assets to reduce the risk of your overall portfolio. It is distinct from diversification, which reduces risk only by substituting assets.A first order hedge of a derivative product is to buy the underlying in an amount equal to the opposite of the derivative of the derivative price with respect to the underlying. This is called "delta hedging." You can also hedge with respect to other parameters, as Anton said, as long as they are traded. And, you can hedge higher order derivatives.

In additional to what has already been said:Paul talks about different types of hedging and their importances in PWIQF... pages 186 to 188. I also thought that Hull gives a brilliant description about how you can use different instruments to hedge a position under different circumstances... for instance, to hedge small movements in price of your underlying... use delta hedge (where the hedging instrument is simply the underlying)... to also hedge out larger movements in price, use gamma hedging (hedging instrument is an option on your underlying).... and so on.... I can't explain it here as well as the authors do... your best bet is to look up the stuff!Regards,Sam