Hedging the Himalayan or Everest Option

Almighty · September 4th, 2009, 5:36 am

While I am aware of the hedging for a normal basket option, could someone please tell me as to how the Himalayan or the Everest Option is hedged where the payoff is based on the best or the worst performing stock? Thanks.

alvinkam · September 6th, 2009, 2:20 pm

You don't really have a reasonable semi-static hedge for these, that's why traders typically charge a fat margin related to 'pin risk' before they take on these trades. At least that's what I do.

GammaTau · September 21st, 2009, 4:25 pm

I would imagine you have some kind of model that gives you a price for the option by modelling the underlying components. This model would then give you deltas wrt these underlyings.