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Arbitrage Theory in Continuous Time$
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Tomas Björk

Print publication date: 2004

Print ISBN-13: 9780199271269

Published to Oxford Scholarship Online: October 2005

DOI: 10.1093/0199271267.001.0001

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Parity Relations and Delta Hedging

Parity Relations and Delta Hedging

(p.121) 9 Parity Relations and Delta Hedging
Arbitrage Theory in Continuous Time

Tomas Björk (Contributor Webpage)

Oxford University Press

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

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