1) How do you physically hedge Vega, Gamma, Theta and Rho? Do you buy and sell straddles? are there any other strategies? 2) I was told that Monte Carlo is not capable to price path dependent options but I dont exactly know why. Can someone explain? Finally are there any good books (not too technical) about financial engineering?Thanks for your help.Brian

To answer your first question, To hedge a specific Greek, use the same style of elimination as you do for a system of equations.e.x. You're buying $30 Calls with a vega of .120You're selling $35 Calls with a vega of .06, and becasue your selling, the vega will be -.06To hedge these 2 options you just sell the ratio of Longvega/shortvega and you sell 2 calls for every 1 you buy.If you want a spreadsheet that I created that covers this, jsut shoot me a PM and I'll email it to you.

and about the book I've heard this one is good for starters.

Thank you for your reply.In your last example, would the objective be to have a hedge as cheap as possible?What if you want all the greeks hedged? Say at the moment I am delta hedged but short vega, i would like to hedge my vega so I go and buy straddles (long X calls, X puts. with a strike = forward price of the underlying). Does this make sense to you?What I dont understnad is how i continue to hedge Gamma and Theta. is there a systematic way of doing it such that the hedge is the cheapest? (or will it be always the cheapest?)Thanks alot.PS: I am new to this forum, do you know how I can send a PM to you to get the spreadsheet?

QuoteOriginally posted by: brianhclo1) How do you physically hedge Vega, Gamma, Theta and Rho? Do you buy and sell straddles? are there any other strategies? 2) I was told that Monte Carlo is not capable to price path dependent options but I dont exactly know why. Can someone explain? Finally are there any good books (not too technical) about financial engineering?Thanks for your help.BrianI am a little lost but let me try.the answer actually as far as hedging is concerned is quite simple. Look for unspanned stochastic volatility papers. On the web. read the paper/s.2. about book/s - My first introduction to FE was through a guy's book. His name is Paul Wilmott. I first thought that the book(derivative... one book) was too big( i m ok with maths so the moment I saw the PDEs I fell in love with that book). I would suggest you get that book and start from the first chapter and go as much as you can.THIS IS THE BIGGEST FAVOR YOU CAN DO TO yourself if you want to be in this field. Once you cover half that book, jump to others. Yes a spreadsheet is always nice to look at and play around with.Jackson and Stauton or Peter Jackel should be with you for a head-start in solving problems.Other books would be1. Renne and Baxter - 2. Damiano and Fabio - Interest rates3. Joshi for excellent programming points in C++. Financial concept is good,too. Have not seen Duffy's book but heard that a great source for C++ expertise( i take it as given that programming is a skill which is best learnt from a tutor.Duffy gives lectures too)4. Muisela etc,Hunt etc, Rebonatto(excellent read,not too much of maths) can be one after the other.Well, then there is HULL's book. A ready reckoner.cheers