Hedging
Hedging is an important consideration in modern finance.
Whether or not to hedge, how much portfolio insurance is adequate,
and how often to rebalance a portfolio are important considerations
for traders, portfolio managers, and financial institutions alike.
If there were no transaction costs, financial professionals
would prefer to rebalance portfolios continually, thereby minimizing
exposure to market movements. However, in practice, the transaction
costs associated with frequent portfolio rebalancing may be expensive.
Therefore, traders and portfolio managers must carefully assess the
cost required to achieve a particular portfolio sensitivity (for example,
maintaining delta, gamma, and vega neutrality). Thus, the hedging
problem involves the fundamental tradeoff between portfolio insurance
and the cost of such insurance coverage.
 | Hedging Portfolios | | Hedging Functions |  |
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