Parity Relations and Delta Hedging

Tomas Björk

in Arbitrage Theory in Continuous Time

Second edition

Published in print March 2004 | ISBN: 9780199271269
Published online October 2005 | e-ISBN: 9780191602849 | DOI:

Series: Oxford Finance Series

Parity Relations and Delta Hedging

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The structure of the hedging portfolio is quite complicated, and is continuously rebalanced. This continuous rebalancing presents a problem since real life trading has a cost. For managerial purposes, it would be better to replicate a claim with a portfolio that remains constant over time — the buy-and-hold portfolio. This chapter analyses the buy-and-hold portfolio, sensitivity measures known as “the greeks”, and delta and gamma hedging. Practice exercises are included.

Keywords: hedging; pricing; Black-Scholes model; buy-and-hold portfolio

Chapter.  3743 words.  Illustrated.

Subjects: Financial Markets

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