FREE Registration for Economics online tutoring and homework help.




Dynamic Hedging Video Tutorial

Dynamic Hedging: Suppose you have a perfect model of contingent mortgage prepayments, like the one built in the previous lecture. You are willing to bet on your prepayment forecasts, but not on which way interest rates will move. Hedging lets you mitigate the extra risk, so that you only have to rely on being right about what you know. The trouble with hedging is that there are so many things that can happen over the 30-year life of a mortgage. Even if interest rates can do only two things each year, in 30 years there are over a billion interest rate scenarios. It would seem impossible to hedge against so many contingencies. The principle of dynamic hedging shows that it is enough to hedge yourself against the two things that can happen next year (which is far less onerous), provided that each following year you adjust the hedge to protect against what might occur one year after that. To illustrate the issue we reconsider the World Series problem from a previous lecture. Suppose you know the Yankees have a 60% chance of beating the Dodgers in each game and that you can bet any amount at 60:40 odds on individual games with other bookies. A naive fan is willing to bet on the Dodgers winning the whole Series at even odds. You have a 71% chance of winning a bet against the fan, but bad luck can cause you to lose anyway. What bets on individual games should you make with the bookies to lock in your expected profit from betting against the fan on the whole Series?


Please click on the Like button if you liked this video.



Dynamic Hedging - Video Lessons, Tutorials, Ebooks

At SchoolTrainer.com, get access to free study material for Economics in the form of video lessons, tutorials and downloadable ebooks. Not only that; you can get Free Homework Help to get solutions to Economics problems you're stuck with.

We also bring to you interesting stuff like text-books and CD's recommended by teachers and other students that you can buy from trusted online stores to get an extra edge to do well in Economics and other subjects.

Need help with Economics? Get an online Economics tutor to help you with and other areas of .

Register for our online Economics tutoring program to get homework help, help with test preparation and learn from experts to perform well in academics. SchoolTrainer specializes in tutoring for Economics. Our highly qualified Economics tutors can help you with Dynamic Hedging, other Economics homework problems, test preparation and clarification of concepts.

More Free Study Material