The hedging tag has no wiki summary.
19
votes
6answers
3k views
What type of investor is willing to be short gamma?
As far as I understand, most investors are willing to buy options (puts and calls) in order to limit their exposure to the market in case it moves against them. This is due to the fact that they are ...
15
votes
5answers
2k views
Skew arbitrage: How can you realize the skewness of the underlying?
It's not clear to me how to realize skewness. In other words, how do you implement skew arbitrage? There seems to be no well-known recipe like in volatility arbitrage.
Volatility arbitrage (or ...
14
votes
3answers
1k views
Why hold options when you can dynamically replicate their payoff?
When holding vanilla options, you can cancel out, theoretically, all risk with dynamic (delta) hedging. Then you earn the "risk free rate of return".
Why would you make such a portfolio when you can ...
13
votes
2answers
573 views
Duality between constant rebalanced portfolio (CRP) and corresponding derivative
One of the greatest achievements of modern option pricing theory is finding corresponding dynamical trading strategies in linear instruments with which you can replicate and by that price derivative ...
12
votes
5answers
907 views
is beta of a portfolio always meaningful?
Consider the following strategies:
a stat arb strategy with no overnight exposure, but significant market exposure intraday.
a market timing model which is always long or short the market.
etc
is ...
12
votes
2answers
418 views
Can you fully hedge an option in the presence of counterparty risk?
The derivation of the Black-Scholes model assumes no counterparty risk. Does the presence of counterparty risk invalidate the argument behind the model?
EDIT: The question is about options in ...
10
votes
3answers
1k views
Hedging stocks with VIX futures
It seems that VIX futures could be a great hedge for a long-only stock portfolio since they rise when stocks fall. But how many VIX futures should I buy to hedge my portfolio, and which futures ...
10
votes
3answers
730 views
How does UBS hedge its exposure to XVIX ETN?
I am wondering how UBS hedges its exposure to its ETN XVIX. Unless I am grossly overestimating the trading costs, executing the strategy they describe in their prospectus with futures would be quite ...
10
votes
2answers
772 views
Where to find Greeks for futures to form delta-hedged futures portfolio of S&P 500 index/futures
I can't find S&P 500 index (SPX) futures data with Greeks to create delta-hedged portfolios. Do these data exist? I have access to most of the common data sources.
In the meantime, I am trying to ...
9
votes
1answer
241 views
Cost function for hedging portfolio
Let's say I am hedging an exotic instrument $E$ with $N$ liquid instruments $L_i$, each of which has an associated hedging ratio $R_i$ and a bid-ask spread $\delta_i$ (per dollar of notional). What ...
8
votes
1answer
190 views
Hedging duality
We consider a financial market over the time interval $[0,T]$ where a risky asset is a semimartingale $S$. By $\mathbb{P}$ we denote the set of all equivalent local martingale measures (ELMM). We ...
8
votes
1answer
393 views
Hedging long municipal bond portfolio using BMA/SIFMA
A question from one of my members.
Anyone have experience hedging a long municipal bond portfolio using BMA / SIFMA swaps? Anything you can share regarding sizing and structuring the swap and ...
6
votes
2answers
191 views
Is it better to grade hedging strategies based on the sum of absolute or squared hedging errors?
Let's say I have one strategy that has a hedging error of:
2,
2,
-2,
-2
Let's say I have another strategy that has a hedging error of
.5,
.5,
3,
3
Would it be a better idea to grade the hedging ...
6
votes
2answers
558 views
Can one use options on Treasury futures to hedge a portfolio?
Can one use options on Treasury bond futures to hedge a typical fixed income portfolio? If so, how can one estimate the duration for an option on a Treasury futures contract, and taking this a step ...
5
votes
3answers
345 views
Means of inferring trading algorithms from competition trade data
I'm analyzing trades from several participants in a trading competition, and I was wondering - are there known mechanisms for analysis and inference of the logic in a set of trades done by one ...
5
votes
1answer
337 views
How to calculate equivalent futures position?
Let's say I have the following two positions:
Buy ATM SPX call, expires in 1 month
Sell ATM SPX put, expires in 1 month
This creates a synthetic futures position. How do I calculate how many ...
5
votes
1answer
311 views
What are some simple algorithms for hedging vanilla bonds?
My team will soon be implementing an auto hedger for our bond trading desk which will be integrated tightly with our risk application and I am interested in researching how this may work.
Any advice ...
5
votes
1answer
148 views
Quantifying Hedging Error Due To Expiration Day Range?
Let's say I have two call option liabilities that I want to statically hedge with a single call option.
Liabilities:
Liab_Call_1:
Strike: 100
Notional: 1000
DaysToExpiration: 20
Liab_Call_2:
...
5
votes
0answers
152 views
How to build an electricity portfolio for an electricity production company?
I am referring to an electricity production company. Company is located in AsiaPac. The power is generated using Natural Gas fired combined-cycle power plants. Then this electricity is distributed to ...
4
votes
1answer
492 views
How to hedge a bull call spread
I am trying to make a theoretical hedge to a bull call spread. (buy out the money call, sell further out the money call)
What I have now is almost effective but there is one possible 80% loss ...
4
votes
2answers
310 views
Commodity hedging in non-financial companies - any literature available?
Seems like the vast majority of all the Hedging literature is dedicated to the speculative side of it. I am searching for quality papers that deal with the link between financial and physical markets ...
3
votes
2answers
357 views
Debunking risk premium via “hedging” argument? (or why even in the real world $\mu$ should equal $r$)
Since I began thinking about portfolio optimization and option pricing, I've struggled to get an intuition for the risk premium, i.e. that investors are only willing to buy risky instruments when they ...
3
votes
1answer
385 views
Science behind options pricing into Earnings event
I am wondering about studies regarding the uncanny options pricing into public company's earnings reports.
The phenomenon being that the price of a straddle before earnings costs near exactly the ...
3
votes
1answer
275 views
How did bans on short-selling affect the derivatives markets?
Due to the ongoing turmoil in the financial markets a short-selling ban is being considered (again, one has to say, but this time in Europe): ...
2
votes
2answers
530 views
How to Delta Hedge with Futures?
The theory of delta hedging a short position in an option is based on trades in the stock and cash. I.e. I get the option premium and take positions in the stock and cash.
In the classical ...
2
votes
1answer
156 views
hedging two bonds in different currencies with FX forward
Is there a way to make a hedged portfolio using two bonds, one is in EUR, the other one is in USD and FX forward contract? Assume that FX rate follows geometric Brownian motion movement.
2
votes
1answer
354 views
How would you hedge this structure?
I have a contingent claim and I want to find out what is the best structure to meet the continent claim, how to price it and how to hedge it. I am looking more for a qualitative answer.
Suppose I ...
2
votes
0answers
217 views
What is an appropriate hedge ratio for hedging a credit instrument with equity of the same issuer?
Given a bond and a stock issued by the same issuer, what is the appropriate ratio of bond-to-stock one should hold in order to minimize the specific risk to that issuer? Equivalently, what is the ...
1
vote
2answers
104 views
Hedging credit risk using Put equity options
I am looking for some paper or similar which deal with this topic: hedging bankruptcy on firm's debt using Put options written on that firm's equity price.
This should be based on the assumption that ...
1
vote
3answers
161 views
How to hedge the fixed leg of a swap contract?
I happened to get this question for Fixed Income Swap contract. (let's assume it's it's not cross currency).
If the fixed leg is paying 10% interest rate in this contract, but in the market the ...
1
vote
0answers
72 views
Market Exposure and Hedging
Normally the Market exposure associated with your stock/portfolio is your delta for that stock/ portfolio. Basic idea of hedging involved here is buying/selling respective futures depending upon ...
1
vote
0answers
127 views
what is a typical way forex brokerages can provide cheap leverage for their customers?
I'm not very well read in the area of high finance but I'm curious how forex brokerages are able to provide the backing for leverage that they can provide to customers.
Is it possible to do this ...
1
vote
0answers
218 views
Delta-Omega Hedging [closed]
I am currently trying to understand the in's and out's of options and more specifically hedging. I came across a document that was talking about Delta Hedging which is just making sure the delta of ...
0
votes
1answer
222 views
Why is delta-hedging of ATM options near expiry difficult to do? [closed]
Can someone explain to me why the delta-hedging of ATM options near expiry is difficult?
-2
votes
2answers
190 views
BS and delta hedging questions
I have two related questions concerning Black Scholes and delta hedging. I thought about this two questions, but I could not come up with an answer, so maybe you guys & girls can help me:
If an ...
