78 Frequently Asked Questions In Quantitative Finance
Crash (Platinum) hedging The final variety of hedging is
specific to extreme markets. Market crashes have at
least two obvious effects on our hedging. First of all,
the moves are so large and rapid that they cannot
be traditionally delta hedged. The convexity effect is
not small. Second, normal market correlations become
meaningless. Typically all correlations become one (or
minus one). Crash or Platinum hedging exploits the
latter effect in such a way as to minimize the worst
possible outcome for the portfolio. The method, called
CrashMetrics, does not rely on parameters such as
volatilities and so is a very robust hedge. Platinum
hedging comes in two types: hedging the paper value
of the portfolio and hedging the margin calls.
References and Further Reading
Taleb, NN 1997Dynamic Hedging. John Wiley & Sons
Wilmott, P 2006Paul Wilmott On Quantitative Finance, second
edition. John Wiley & Sons
