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1. A portfolio of risky securities, all of which have a common underlying asset, S, is to be dynamically hedged. Given that you can go long or short on the asset x and that you can deposit into and borrow from a risk-free cash account, carefully explain the process of dynamic hedging. Give details of why it is not possible to delta-gamma hedge using only shares and futures.
2. Explain the process of static hedging and give details on why sometimes static hedging does not work and dynamic hedging is necessary.