Futures and forwards can be used to hedge commodity and exchange risk. Hedging with Futures. Our goal will be to choose a hedging policy that minimises the standard deviation of our total costs. A financial institution that sells options is at great risk. For example, if a Wall Street firm sells a call option there is no theoretical upper limit on the discounted cash value that the purchaser of the option will receive at expiration.
Delta hedging enables a firm writing options to control the riskiness of their position.
Using the Risk-Neutral Approach to Value Real Options. The risk-neutral approach enables us to value many quantities which derive their value from an underlying asset. In most books, you do this by finding a combination of puts and calls which replicates the payoffs of what you are trying to value. We do not need to do this. Pricing American Options with Binomial Trees.