I understand how to hedge delta and gamma risk. Could someone explain to me how cross gamma hedging is done by the trading desk. In particular I am interested in hedging for interest rate exotics. So lets just take cross gamma of rates and vols.

  • $\begingroup$ Traders may be able to comment on this. My feeling is that the cross gamma hedge ratio is not really hedged, but is used for P&L approximations. Moreover, in most of cases, as it is of the second order and small, it is ignored. $\endgroup$ – Gordon Feb 19 '16 at 15:33
  • $\begingroup$ Thanks for your comments Gordon. In my previous roles, I have seen cross gammas computed as part of the end of day risk reports. We were also requested to generate scenarios which involve shifting both rates and vols at the same time. Also I don't think cross gamma risk is always small to be ignored. Would be good if some exotic trader could comment on this. $\endgroup$ – ywong Feb 21 '16 at 4:28

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