Lecture 21 - Dynamic Hedging and Average Life

author: John Geanakoplos, Yale University
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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Description

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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