15. juillet 2023

In simple terms, think of hedging like insurance. A bank sold a specific type of "insurance" (Down-and-Out European Call) that pays out only if the stock price doesn't dip below a certain level (the barrier). To safeguard itself, the bank uses a mix of buying and selling other financial "insurances" (call and put options). The magic formula ensures that if the stock dips below the barrier, the bank won't lose money. It's a balancing act, where buying one thing counteracts the selling of another