At the following link, so far as I can remember - and given my limited mathematical ability - Derman suggests that you can hedge volatility by buying a continuous portfolio of long options, or something:


http://www.gs.com/qs/doc/volswaps.pdf


Is that basically the idea? Or did I miss something?


Then, buried deep in the following post, I argued that, based on the inverse correlation between stock prices and uncertainty, that you could probably construct a simpler hedging strategy for volatility:


http://www.twoplustwo.com/cgi-bin/ne...s.pl/read/1627


Might you do me the favor of, like, correcting my paper here - explaining in non-mathematical terms where I have been led astray?


Also, please tell the forum more about what you mean by vanilla versus European/exotic options, and how it is relevant. I might not understand it, but someone will!


Finally, so far as Brownian motion, I would not dismiss it, but rather celebrate it as the number-one fair-value discovery tool in all of finance!


leroy