[Think of it as insurance. When people decide to hedge, they are insuring themselves against a negative event. This doesn't prevent a negative event from happening, but if it does happen and you're properly hedged, the impact of the event is reduced. So, hedging occurs almost everywhere, and we see ...

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0
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1answer
563 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
1answer
418 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 ...
4
votes
1answer
703 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 ...
2
votes
0answers
436 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 ...
2
votes
1answer
254 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 ...
5
votes
3answers
445 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 ...
11
votes
2answers
848 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 ...
4
votes
1answer
1k 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 ...
17
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5answers
4k 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 ...
1
vote
0answers
315 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 ...
6
votes
2answers
212 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 ...
15
votes
3answers
3k 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
770 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 ...
8
votes
1answer
631 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
1k 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 ...
3
votes
1answer
377 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): ...
5
votes
1answer
490 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 ...
6
votes
1answer
613 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
177 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: ...
4
votes
2answers
456 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 ...
19
votes
6answers
7k 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 ...
9
votes
1answer
293 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 ...
4
votes
2answers
335 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 ...
11
votes
3answers
872 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
1k 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 ...
12
votes
5answers
1k 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 ...
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 ...