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On Question 1, you have zero delta (since you delta hedge) and negative gamma. So the cases where you lose money are (1) large upward movement of the underlying, (2) large downward movement of the underlying. The cases where you make money are small upward or downward movements. Another way to look at it is that you lose money in case of an increase in vol, ...


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Yes, AFAIK, they used Edgeworth expansions [ download ] The objective of this paper is to describe a quick way to price European average options. While it is very difficult to determine the probability distribution for the average, all of its moments can be readily determined. Thus, an Edgeworth series expansion can be used to approximate the ...


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