[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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2
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1answer
451 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
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0answers
73 views

Example of optimal delta hedging in G. Barles, H.M. Soner option pricing paper

There is a paper Option pricing with transaction costs and a nonlinear black-scholes equation by Guy Barles and Halil Mete Soner. And there is a section about optimal (delta) hedging, which I do not ...
2
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0answers
77 views

What is the correct hedging strategy using futures?

In practice, even without maturity and underlying mismatch, hedging using futures does not always require a one-to-one hedge ratio. Tailing factor needs to be considered. Suppose the current spot ...
2
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0answers
40 views

Portfolio optimised for diversification and regular yield. How to hedge?

Here is a portfolio optimisation for equity dividend and yield designed to diversify holdings and produce regular monthly returns using only ETFs complete with R code. ...
2
votes
1answer
365 views

What is the hedging underlying of MBS

I am working on hedging agency MBSs using treasury bonds. So my question raise as which treasury bond should more likely be a hedging underlying of a MBS. What is the matching criteria usually for MBS ...
2
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0answers
80 views

The concept of an incomplete market

While skeeming the relevant literature and web-sites I noticed that mostly the concept of the incomplete market is reduced to the following statement "A market is incomplete if there are more ...
2
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0answers
542 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
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0answers
351 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 ...
1
vote
2answers
59 views

hedge a USD index into EUR

Say I have the daily index levels for the S&P. It is then very simple to calculate the daily returns. I however want to calculate the hedged returns into Euros. I have the daily exchange rates ...
1
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2answers
176 views

How market making in Index options is done?

I have been thinking about this one for last couple of days. With options on share we hedge on cash and the underlying equity as per Black-Scholes formulation. But I am confused on Index options. ...
1
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2answers
211 views

M&A hedging an equity portfolio against an index

Quick Note This question was already posted under the userID user8170. Reason being I could not access my account. Now I am able to login to my account I am reposting the question here and will ...
1
vote
1answer
83 views

A simple question on Delta hedging

In the Black and Scholes model, when it is needed to immunize the portfolio from variations in the stock the argument given is the following. If $\alpha_t$ is the amount of invested in the stock, ...
1
vote
2answers
85 views

Opposite of Tail-Risk Hedge (Established Vocabulary)

I'm working on a client memo explaining several approaches to equity hedging, and I'm looking for a not-too-technical term for a hedging strategy where I try to keep options near the money, as to have ...
1
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2answers
143 views

Pricing Principle 1

In Tomas Björk's Arbitrage Theory in Continuous Time (or here), $\exists$ this Pricing Principle. Is the one in red supposed to be the proof of the Pricing Principle 1? Or merely an intuitive ...
1
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1answer
136 views

Is it better to hedge or reduce the position size? [closed]

Traders hedge to reduce their risk. However, wouldn't reducing the position achieve the same results while keeping the risk management process simpler? At least, one need not worry about making the ...
1
vote
1answer
64 views

How frequently do traders rebalance their gamma hedges?

Say, for instance, that you've set up a delta-neutral straddle (i.e. you are long volatility, short time decay) and want to dynamically hedge your gamma in order to offset losses due to theta. Is ...
1
vote
1answer
64 views

Static and Dynamic Hedging of Vol/Var Swaps

Why can a variance swap be perfectly statically hedged whereas a volatility swap requires dynamic hedging? Possible reference request to the corresponding literature.
1
vote
2answers
32 views

EUR issuance using forwards to hedge FX risk

Trying to think about the right way to hedge a EUR denominated issuance from FX risk only. Say I have an annual pay 20-year EUR bond and I want to hedge the FX risk but take the interest rate risk. I ...
1
vote
1answer
37 views

Effect of different maturity options in delta-gamma-hedging

I read about hedging with options and think i got it. However there is a case am not sure how to handle. Is there any exception in the delta-gamma-hedging-(calculaton-)technique? - say: solve an set ...
1
vote
2answers
278 views

Vega hedging with implied volatility smile

I have a problem with vega hedging. Consider the management of an exotic derivative, such as Barrier option. Typically we do the following tasks: selecting a pricing model, say, a local volatility ...
1
vote
1answer
42 views

How to effectively hedge a Fixed-Term deal in a foreign currency?

Assume my firm is based in USD and agrees with some counterparty to buy, at time $T$, some quantity $Q$ of asset $A$ for a fixed price $K$. Assume also that $A$ prices and $K$ are denominated in EUR. ...
1
vote
1answer
83 views

Hedging behind the decomposition of american put options

Now I'm reading a paper:"alternative characterizations of american put options" , the authors are Carr,Jarrow,Myneni http://www.math.nyu.edu/research/carrp/papers/pdf/amerput7.pdf After theorem 1 ...
1
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1answer
52 views

Hedging using relative values

Consider I have two stocks $A$ and $B$, $A$ is trading at $\$40$ and $B$ at $\$30$. The standard deviation of its returns are $\sigma_A=25\%$ and $\sigma_B = 30\%$. Correlation between the returns is ...
1
vote
1answer
87 views

Can you hedge a derivative with a CASH|spot product or does it have to be another derivative instrument

Consider you have a SWAP (any kind) to hedge this SWAP, you will most likely use another Derivative,but can you use a cash|spot product to hedge this. Like Cash Equity or FX Spot
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2answers
166 views

Who Uses American Options?

...in other words, why would a person want to have the right to exercise an option early? What advantage does that really give you? Are Euro-style options not good enough for some people? Who are ...
1
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0answers
35 views

References about market neutral portfolios that isolate unsystematic risk

I am looking for references, information, backtests etc. about market neutral portfolios that go long the index and short stocks of that index with high unsystematic (idiosyncratic) risk. The idea is ...
1
vote
0answers
41 views

Motivation for hedging volatility using VIX ETNs

i wondered what the motivation for professional investors could be to engage in VIX ETNs. Would they even think about trading this kind of product? (they normally should have access to VIX options, ...
1
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0answers
76 views

How to hedge an ETF position with a basket of its underlying components

In practice, when one takes on a large equity ETF position, I would imagine it's not necessarily "optimal" to hedge using a basket of all the constituents even though that should be a perfect hedge. ...
1
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0answers
26 views

Portfolio Hedging under Uncertain Correlations

I have a portfolio ($w_0=1$) and two hedging assets ($w_1,w_2$) and a co-variance matrix for the three $\Sigma$. However the co-variance $\Sigma$ is only an estimate. For fairly well behaved assets ...
1
vote
1answer
274 views

“Hedging” a put option, question on exercise

I have a question on the following exercise from S. Shreve: Stochastic Calculus for Finance, I: Exercise 4.2. In Example 4.2.1, we computed the time-zero value of the American put with strike ...
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0answers
52 views

Hedge volatility decreases

My particular options positions are typically a long delta, and long vega. Decreases in implied volatility, or specifically the VIX, can drastically alter the profitability of my position. Is there a ...
1
vote
1answer
1k views

Hedging a Long Equity Swap by Shorting the Stock

Suppose that I enter an Equity Swap, such that I pay a floating rate and I receive the equity return. The payment is every one year for both the rate and the return, and the swap expires in one year. ...
1
vote
0answers
52 views

Existence of a hedging portfolio and martingale property

Lets assume that the underlying follows a Brownian motion and the market has the standard properties of the Black Scholes setting. Is there a way to find a hedging portfolio for every discounted ...
1
vote
0answers
93 views

Calculating the Hedge Ratio

Suppose we have an index whose value is calculated by a weighted geometric mean. Now we want to recreate the index using its underlying components. How would we go about calculating the hedge ratios ...
1
vote
0answers
170 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 ...
0
votes
1answer
674 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?
0
votes
1answer
50 views

Why are there two expressions for the Black-Scholes hedging portfolio

I am new to derivatives pricing and am trying to understand why there are two different expressions for the Black-Scholes hedging portfolio. The first approach, used in books like Hull, stipulates ...
0
votes
1answer
36 views

Known future volatility and difficulty in predicting final P/L

I have started Chapter 1 of Dynamic Hedging by Taleb and it starts by saying "Even if traders knew the exact future volatility but hedged themselves (rebalanced the gamma) at discretely spaced ...
0
votes
1answer
147 views

Intuitive understanding of Black-Scholes pricing

The Black-Scholes formula entails market completeness, so the price of an option is only the cost associated with dynamically hedging the option. Where does this cost come from? I don't see how ...
0
votes
1answer
152 views

Implication of the Greeks under jump diffusion model

Consider jump diffusion model proposed by Merton and Kou. As far as i know, most paper only dealt the valuation of option under the jump diffusion model. As i expected, because of the ...
0
votes
1answer
417 views

Hedging future USD cost using different IR and forwards

I am facing a problem where I suppose an expense in 6 months from now of 2,500USD. My home currency shall be EUR, and I am trying to hedge given the following information. ...
0
votes
3answers
202 views

hedging with known volatility

Suppose we have a stock $X$ at which trades at 100 dollars. We suppose the stock follows a geometric brownian motion. We know that the interest rate is zero and annual volatility is 10 percent. How ...
0
votes
0answers
21 views

How to appropriately measure volatility in assets with different execution dates?

Let's say I have two assets and I am hedging them with going short on two other assets. Let's say that asset 1 is expected to expire in one day and asset two is expected to expire in two days. Let's ...
0
votes
0answers
29 views

hedging of a spread option with call

We have 2 underlying $S^{1}$ and $S^{2}$ with BS dynamic under the risk-neutral measure (r constant...) I found the (big) PDE satisfied by the price function $u(t,x,y)$ of a call spread whose payoff ...
0
votes
1answer
107 views

Currency risk USD>EUR>EGP

Seeking input on hedging risk on USD to Euro with a 3rd component of payroll issued in Egyptian Pounds. We are a US corp invoicing a Germany entity in Euro with massive payroll being paid in Egyptian ...
0
votes
0answers
125 views

How to optimally hedge construction loans with interest rate swaps?

We are a borrower with a construction loan that is pay floating. At the inception of the loan, we entered into a pay-fixed/receive-floating interest rate swap with a growing notional profile that ...
-1
votes
2answers
320 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 ...