What Is the Primary Difference between a Static Hedge and a Dynamic Hedge?
A static hedge is one where the hedging instrument, such as a long-dated option, is bought and held until expiration without adjustment. A dynamic hedge, such as a delta-hedged position, requires continuous or frequent adjustment of the position size (e.g. buying or selling the underlying asset) to maintain a desired hedge ratio as the underlying price changes.
Glossar
Frequent Adjustment
Calibration ⎊ Frequent Adjustment, within cryptocurrency derivatives, necessitates continuous recalibration of models to reflect rapidly evolving market dynamics and liquidity profiles, particularly impacting volatility surface construction and pricing accuracy.
Hedge Ratio
Calculation ⎊ The Hedge Ratio quantifies the necessary size of a derivative position required to offset the price risk inherent in an underlying asset or portfolio, representing the change in the derivative's price relative to the change in the underlying.
Hedge
Mitigation ⎊ A hedge, within cryptocurrency and derivatives markets, represents a strategic position established to offset potential losses stemming from adverse price movements in an existing asset or portfolio.
Dynamic Hedging
Calibration ⎊ Dynamic hedging, within cryptocurrency and derivatives markets, represents a continuous rebalancing of a portfolio to maintain a desired risk exposure, typically delta neutrality for option positions.
Static Hedge
Framework ⎊ A static hedge, within cryptocurrency derivatives, represents a risk mitigation strategy predicated on establishing a fixed, predetermined relationship between an asset's price and a derivative instrument, typically an option.