How is the option hedged
How is the option hedged?
Expert
In such situation the option, being exchange traded, it would probably be marked to market by using the implied volatility, but the final profit will depend upon the realized volatility (assume that be optimistic and assume this is as forecast). Hedging by using implied volatility in the delta formula theoretically removes the otherwise random fluctuations in the mark-to-market value of the hedged option portfolio, other than at the cost of making the last profit path dependent, directly related to realize gamma beside the stock’s path.
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