Deep Hedging: Employing Neural Networks for Dynamic Hedging Strategies

Janelle Turing
17 min readSep 22, 2024

Managing risk is paramount. Hedging, a cornerstone of risk management, involves strategically taking positions to offset potential losses from adverse price movements. Traditional hedging methods, often rooted in the Black-Scholes model, have long been employed, but their limitations in dealing with non-linear relationships and complex market dynamics have become increasingly apparent. Enter deep hedging — a revolutionary approach leveraging the power of artificial intelligence, specifically neural networks, to navigate the complexities of financial markets.

Deep hedging represents a paradigm shift in risk management, offering the potential for enhanced hedging accuracy, reduced transaction costs and improved performance in volatile markets. This tutorial delves into the exciting realm of deep hedging, equipping you with the knowledge and tools to implement these cutting-edge strategies.

Photo by AltumCode on Unsplash

Table of Contents

  • Foundations of Option Pricing and Hedging: A review of Black-Scholes, Greeks and traditional hedging methods.
  • Neural Networks for Financial Time Series: Architectures like RNNs and LSTMs for capturing temporal dependencies in market data.
  • Constructing a Deep Hedging Model with TensorFlow/PyTorch: Implementation of a neural…

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Janelle Turing

Your AI & Python guide on Medium. 🚀📈 | Discover the Power of AI, ML, and Deep Learning | Check out my articles for a fun tech journey – see you there! 🚀🔍😄