Lecture 21 - Dynamic Hedging and Average Life
recorded by: Yale University
published: March 17, 2012, recorded: December 2009, views: 3277
released under terms of: Creative Commons Attribution No Derivatives (CC-BY-ND)
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This lecture reviews the intuition from the previous class, where the idea of dynamic hedging was introduced. We learn why the crucial idea of dynamic hedging is marking to market: even when there are millions of possible scenarios that could come to pass over time, by hedging a little bit each step of the way, the number of possibilities becomes much more manageable. We conclude the discussion of hedging by introducing a measure for the average life of a bond, and show how traders use this to figure out the appropriate hedge against interest rate movements.
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