# hedging with known volatility

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?

• Delta hedging of a vanilla European option on X? Apr 9 '14 at 7:37
• It is not really clear what you are trying to hedge - an option? If yes- which one ? Apr 9 '14 at 9:17
• Please tell us what your are asking.
– Ric
Apr 14 '14 at 8:11
• There may be an option somewhere.... Jul 9 '14 at 22:55

## 3 Answers

You sell your stock $S$ against some cash.

• correct answer ...
– Ric
Jul 9 '14 at 8:26

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.

• This is only true if the factor are investable. This is a geometric Brownian motion - this is theoretical only.
– Ric
Jul 9 '14 at 8:25

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