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Taleb's bible
Hi,Just one question concerning a paragraph in Taleb's "Dynamic Hedging" :Referring to Cash products and commoditized instruments, Taleb says : "Cash products allow traders to completely offset the risk of their trades and avoid the necessity of warehousing contracts for any length of time. What does he mean by "warehousing contracts ?Thks a lot
Taleb's bible
I haven't looked up the context, but on the face of it he means holding a contract, and accepting the risk, for an extended period of time.
Taleb's bible
Yeah - looks like it. He means 'warehousing' as opposed to hedging out the risk by taking an equal but opposite position in the same (or a related instrument). In the absence of a natural hedge, for example in the weather derivatives market, the seller of protection or insurance basically just has to take the risk of having to pay out if the weather turns against him. (I'm generalizing here just to illustrate the point.) That's because there's no 'cash product' as the ones which Taleb refers to (i.e. you can't buy or sell an underlying 'weather index')...