David Mandel (J. P. Morgan)

The Geometry of Statistical Hedging

Market makers rely on robust hedging techniques to manage risk and retain inception revenue. Classical hedging involves trading in instruments to neutralize duration exposure, whereas statistical hedging involves trading to reduce exposure to estimated statistical quantities. The statistical nature of these hedges offer a geometrical perspective of hedging, either as position vectors in Euclidian space or square-integrable random variables. In this talk, I will apply these perspectives to practical hedging challenges faced by a fixed income market maker.

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