It shows the way a hedge can be constructed using four options (as in Section 19.14) and
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It shows the way a hedge can be constructed using four options (as in Section 19.14) and two ways a hedge can be constructed using 16 options.
a. Explain the difference between the two ways a hedge can be constructed using 16 options.
Explain intuitively why the second method works better.
b. Improve on the four-option hedge by changing Tmat for the third and fourth options.
c. Check how well the 16-option portfolios match the delta, gamma, and vega of the barrier option.
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