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The "not too techincal" term is the protective put. It usually applies to buying 1 put per 100 shares of stock owned, but you can explain that you hedge less, if you don't put on the full protective put. The technical term is delta hedging. I have used this term with less sophisticated clients after I explained what it meant.


If you are already long the stock, the way to hedge that risk is to go long a put and short a call, or what we call a option collar. This is also know as a "hedge wrapper" if you are trying to go for the marketing buzzword. Per Investopedia: The purchase of an out-of-the money put option is what protects the underlying shares from a large downward move ...


In general, if one can create a portfolio with the same payoff as the derivative, their prices must be equal. This is also called "Law of One Price". Here an excerpt from my script: Here EMM = Equivalent Martingale Measure (Q), NA = No-Arbitrage.


Is the one in red supposed to be the proof of the Pricing Principle 1? Or merely an intuitive explanation? It is not a proof. The explanation/reasoning in this paragraph lets the author state the pricing principle. It has hints on how to prove Prop 2.9 (for instance, see the line ...no difference between holding the claim and the portfolio...). If ...


It depends on your ETF. Some have synthetic exposure to the index sold by a sponsor (ie someone give them exactly the performance of the index) but this has a cost (a constant / deterministic drag on the NAV of your ETF which doesn't appear in your tracking error). Futures on the other hand have basis, are sensitive to changes in implied dividends and ...


You first need to define "hedge". Or else the question remains undefined, and the minimum risk is achieved not trading at all ;-)


Hopefully this is marginally helpful. The delta is simply the ratio of the Malliavin derivatives. By chain rule, $$\mathscr{D}_t C_t = {\partial C_t \over \partial R_t } \mathscr{D}_t R_t$$ Thus $$ \Delta_t = {\mathscr{D}_t C_t \over \mathscr{D}_t R_t } $$ You should be golden if you can work out what those MDs are for whatever model you're in. ...

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