Maximum draw-down and directional trading

In this article, introduce new techniques to control the maximum draw-down (MDD). One can view MDD as a contingent claim, and price and hedge it accordingly as a derivatives contract. Trading draw-down contracts or replicating them by hedging would directly address the concerns of portfolio managers who would like to insure against market drops. Similar contracts can be written on the maximum draw-up (MDU). We show that buying a contract on the MDD or MDU is equivalent to adopting a momentum

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