Define the Term "Tail Risk" and How It Relates to Short-Term Hedging ⎊ Path

Define the Term “Tail Risk” and How It Relates to Short-Term Hedging.

Tail risk is the risk of an extremely rare and unexpected event that causes a massive loss, often represented by the "fat tails" of a probability distribution. Short-term hedging, especially with out-of-the-money options, can be ineffective against tail risk because the option may expire before the extreme event occurs.

A proper tail-risk hedge requires a long-dated, deep out-of-the-money option or a strategy designed to protect against massive, sudden market moves.

How Does the Probability of Expiring ITM Relate to the Concept of ‘Moneyness’?

What Is the Relationship between “Black Swan” Events and Tail Risk?

Explain the Concept of ‘Tail Risk’ in the Context of Customized Derivatives

Define the Statistical Concept of “Kurtosis” in Financial Returns.

How Does a “Black Swan” Event Relate to Tail Risk?

How Does a “Tail Risk” Event Illustrate the Failure of Historical Volatility as a Predictive Measure?

What Is the Risk Associated with Trading the “Wings” of the Volatility Smile?

How Does a Portfolio’s “Value at Risk” (VaR) Calculation Often Underestimate Tail Risk?