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TAIL RISK HEDGING: Creating Robust Portfolios for Volatile Markets by Vineer Bhansali

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Basics: Tail Risk Hedging for Defense

In this chapter I outline the basic elements for building a framework for tail risk hedging. I start with definitions of the key terms that I have found to be useful in designing a hedge program. Next, I discuss the costs and benefits of changing the hedge horizon based on market conditions. This “rolling” aspect of hedges is important if you think of tail hedging as an asset-allocation decision rather than as a “trade.” Finally, I discuss benchmarking of tail hedges, which, though obvious, sets the stage for the discussion of active tail risk hedging later. Note that for the purpose of this chapter, I discuss hedging of the primary risk factor in most investment portfolios, that is, equity market–driven ...

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