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Suppose we have a stock $X$ at which trades at 100 dollars. We suppose the stock follows a geometric brownian motion. We know that the interest rate is zero and annual volatility is 10 percent. How can we hedge the risk?

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    $\begingroup$ Delta hedging of a vanilla European option on X? $\endgroup$ – pincopallino Apr 9 '14 at 7:37
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    $\begingroup$ It is not really clear what you are trying to hedge - an option? If yes- which one ? $\endgroup$ – Probilitator Apr 9 '14 at 9:17
  • $\begingroup$ Please tell us what your are asking. $\endgroup$ – Ric Apr 14 '14 at 8:11
  • $\begingroup$ There may be an option somewhere.... $\endgroup$ – were_cat Jul 9 '14 at 22:55
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You sell your stock $S$ against some cash.

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    $\begingroup$ correct answer ... $\endgroup$ – Ric Jul 9 '14 at 8:26
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You need a risk model to understand the sources of risk for your stock. If the risk factors can be traded then you can use the factor loadings to hedge your risk.

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  • $\begingroup$ This is only true if the factor are investable. This is a geometric Brownian motion - this is theoretical only. $\endgroup$ – Ric Jul 9 '14 at 8:25
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You first need to define "hedge". Or else the question remains undefined, and the minimum risk is achieved not trading at all ;-)

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