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Dynamic Hedging: Managing Vanilla and Exotic Options, by Nassim Nicholas Taleb
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Dynamic Hedging is the definitive source on derivatives risk. It provides a real-world methodology for managing portfolios containing any nonlinear security. It presents risks from the vantage point of the option market maker and arbitrage operator. The only book about derivatives risk written by an experienced trader with theoretical training, it remolds option theory to fit the practitioner's environment. As a larger share of market exposure cannot be properly captured by mathematical models, noted option arbitrageur Nassim Taleb uniquely covers both on-model and off-model derivatives risks.
The author discusses, in plain English, vital issues, including:
- The generalized option, which encompasses all instruments with convex payoff, including a trader's potential bonus.
- The techniques for trading exotic options, including binary, barrier, multiasset, and Asian options, as well as methods to take into account the wrinkles of actual, non-bellshaped distributions.
- Market dynamics viewed from the practitioner's vantage point, including liquidity holes, portfolio insurance, squeezes, fat tails, volatility surface, GARCH, curve evolution, static option replication, correlation instability, Pareto-Levy, regime shifts, autocorrelation of price changes, and the severe flaws in the value at risk method.
- New tools to detect risks, such as higher moment analysis, topography exposure, and nonparametric techniques.
- The path dependence of all options hedged dynamically.
Dynamic Hedging is replete with helpful tools, market anecdotes, at-a-glance risk management rules distilling years of market lore, and important definitions. The book contains modules in which the fundamental mathematics of derivatives, such as the Brownian motion, Ito's lemma, the numeraire paradox, the Girsanov change of measure, and the Feynman-Kac solution are presented in intuitive practitioner's language.
Dynamic Hedging is an indispensable and definitive reference for market makers, academics, finance students, risk managers, and regulators.
The definitive book on options trading and risk management
"If pricing is a science and hedging is an art, Taleb is a virtuoso." -Bruno Dupire, Head of Swaps and Options Research, Paribas Capital Markets
"This is not merely the best book on how options trade, it is the only book." -Stan Jonas, Managing Director, FIMAT-Society GARCH
"Dynamic Hedging bridges the gap between what the best traders know and what the best scholars can prove." -William Margrabe, President, The William Margrabe Group, Inc.
"The most comprehensive, insightful, intuitive work on the subject. It is instrumental for both beginning and experienced traders."-
"A tour de force. That rare find, a book of great practical and theoretical value. Taleb successfully bridges the gap between the academic and the real world. Interesting, provocative, well written. Each chapter worth a fortune to any current or prospective derivatives trader."-Victor Niederhoffer, Chairman, Niederhoffer Investments
- Sales Rank: #65073 in Books
- Published on: 1997-01-14
- Original language: English
- Number of items: 1
- Dimensions: 10.00" h x 1.31" w x 7.32" l, 2.46 pounds
- Binding: Hardcover
- 528 pages
From the Publisher
Written by a leading options trader and derivatives risk advisor to global banks and exchanges, this book provides a practical, real-world methodology for monitoring and managing all the risks associated with portfolio management. Fills a big gap in investment literature--the only book to share complex options trading strategies and advanced risk management methods with trading professionals.
From the Back Cover
Dynamic Hedging is the definitive source on derivatives risk. It provides a real-world methodology for managing portfolios containing any nonlinear security. It presents risks from the vantage point of the option market maker and arbitrage operator. The only book about derivatives risk written by an experienced trader with theoretical training, it remolds option theory to fit the practitioner's environment. As a larger share of market exposure cannot be properly captured by mathematical models, noted option arbitrageur Nassim Taleb uniquely covers both on-model and off-model derivatives risks.
The author discusses, in plain English, vital issues, including:
- The generalized option, which encompasses all instruments with convex payoff, including a trader's potential bonus.
- The techniques for trading exotic options, including binary, barrier, multiasset, and Asian options, as well as methods to take into account the wrinkles of actual, non-bellshaped distributions.
- Market dynamics viewed from the practitioner's vantage point, including liquidity holes, portfolio insurance, squeezes, fat tails, volatility surface, GARCH, curve evolution, static option replication, correlation instability, Pareto-Levy, regime shifts, autocorrelation of price changes, and the severe flaws in the value at risk method.
- New tools to detect risks, such as higher moment analysis, topography exposure, and nonparametric techniques.
- The path dependence of all options hedged dynamically
Dynamic Hedging is replete with helpful tools, market anecdotes, at-a-glance risk management rules distilling years of market lore, and important definitions. The book contains modules in which the fundamental mathematics of derivatives, such as the Brownian motion, Ito's lemma, the numeraire paradox, the Girsanov change of measure, and the Feynman-Kac solution are presented in intuitive practitioner's language.
Dynamic Hedging is an indispensable and definitive reference for market makers, academics, finance students, risk managers, and regulators.
The definitive book on options trading and risk management
"If pricing is a science and hedging is an art, Taleb is a virtuoso." —Bruno Dupire, Head of Swaps and Options Research, Paribas Capital Markets
"This is not merely the best book on how options trade, it is the only book." —Stan Jonas, Managing Director, FIMAT-Société Générale
"Dynamic Hedging bridges the gap between what the best traders know and what the best scholars can prove." —William Margrabe, President, The William Margrabe Group, Inc.
"The most comprehensive, insightful, intuitive work on the subject. It is instrumental for both beginning and experienced traders."—
"A tour de force. That rare find, a book of great practical and theoretical value. Taleb successfully bridges the gap between the academic and the real world. Interesting, provocative, well written. Each chapter worth a fortune to any current or prospective derivatives trader."—Victor Niederhoffer, Chairman, Niederhoffer Investments
About the Author
Nassim Nicholas Taleb is the founder of Empirica Capital LLC, a hedge fund operator, and a fellow at the Courant Institute of Mathematical Sciences of New York University. He has held a variety of senior derivative trading positions in New York and London and worked as an independent floor trader in Chicago. Dr. Taleb was inducted in February 2001 in the Derivatives Strategy Hall of Fame. He received an MBA from the Wharton School and a Ph.D. from University Paris-Dauphine.
Most helpful customer reviews
8 of 8 people found the following review helpful.
Advanced Text on Derivatives Trading
By bailey_nyc
Taleb is one arrogant dude who loves flooding his books with archaic words which were last employed in the English Language by Geoffrey Chauncer. But alas, Dynamic Hedging is a strong advanced text which goes through many nuanced topics. For example, he makes some good points on managing option greeks. Some chapters I really enjoyed which are hugely important in practice that you don't learn in any classroom: soft American options, discrete delta vs continuous delta, fungibility. Just a warning that you might have to read over sections multiple times before you digest ideas.
For example, for american options, you can tend to think of the early exercise having some sensitivity to interest rates (as rates go higher, it becomes more optimal to exercise puts and less optimal to exercise calls), so in some circumstances, the early exercise provision of american option is actually an option on rates. Also, every mathematician teaches delta as a continuous derivative d[option value]/d[spot], but really what's important is to the know the delta at discrete intervals since no one hedges continuously and also since in a real options book the greek sensitivities might flip or go through extreme changes over discrete intervals. Just some great material which makes you think hard.
The structure of the book jumps over the place, but mainly Taleb is focused on options, volatility, and exotics. So not exactly a good book on vanilla rates or commodities for example.
This text is certainly one I keep as a reference guide on my desk. As a sign of its value, everytime I read it, I do learn something new. I rated it highly based solely on the excellent and juicy material but the writing style is really horrible. Not for beginners but a great read for anyone interested in the deep details of trading derivatives.
4 of 4 people found the following review helpful.
Filled with gems for those who are willing to work to find them
By Charles O Grigsby
Not a page turner. This is one of those books that requires the reader to work hard for the gems hidden within, but it is Taleb who has done the really hard work of organizing information in a way that makes the gems accessible to the reader in the first place. This book is more about exploring and explaining effective thought process in risk management than it is a "how to" manual. I am reminded of the John Houseman character in "the Paper Chase" TV series who says: "you come into the class with a head full of mush. You teach yourselves the law, I teach you to think like a lawyer." This book teaches the reader to think like a trader.
0 of 0 people found the following review helpful.
A must for modest retail investor
By Andrey Solovyev
Especially recommended to modest retail investors - this is like a chance to glance inside of mechanics of those people who repeatidly rip your money off you. This is like a confession and intelligence in the same bottle. Don't miss it, here you get a chance to assess whom you play with, what's their intellectual ability, knowledge base, educational level, math background.
Consider this as the open book on "other side of your trade". May save you a couple of bucks )
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