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Measuring and managing market, credit and Op risk [81]

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Bullet points include: Alternative is to redesign liability / product / process to eliminate need for dynamic hedging Generally needs to be done at outset, rather than later on in product life Or hedge with other non-linear instruments (e.g. delta-gamma-vega: select so that combined delta, gamma, vega all close to zero) C.f. gap risk in dynamic hedging Arises because in Black-Scholes world hedge adjustments theoretically supposed to happen instantaneously, but if market jumps / gaps then this is impossible Can be reduced by redesigning product so that gap risk is carried by investor. But risk may then be transformed into mis-selling risk (operational risk)

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