[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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2answers
363 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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1answer
144 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 ...
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1answer
21 views

Binary Options hedge Forex position

if I am short GBPJPY and it start to jump up, instead of closing it, could I use Binary Options to long it immediately after jump up? So I could hedge current Forex position if possible.
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0answers
174 views

American Swaption Heding with Malliavin Calculus

Hedging American Swaption Hello, I priced an American swaption using Black model with swap rates diffusion to find the european (call) price at t. $$ C_t = (\delta \sum_{j=n+1}^{M+1} Z_t^{T_j})[R(t,...
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0answers
1k views

Bridgewater's Daily Observations

Bridgewater Associates send out Daily Observations to their clients, but I haven't found many traces of these publications online. The series started some 40 years ago by Ray Dalio, and there're just ...
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0answers
161 views

Hedging cross gamma

I understand how to hedge delta and gamma risk. Could someone explain to me how cross gamma hedging is done by the trading desk. In particular I am interested in hedging for interest rate exotics. So ...
2
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0answers
82 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 ...
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0answers
97 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 ...
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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. http://prescientmuse.blogspot....
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0answers
97 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 ...
2
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0answers
81 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 ...
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0answers
582 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 ...
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0answers
37 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 ...
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0answers
45 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, ...
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0answers
83 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. ...
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0answers
28 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 ...
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0answers
57 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
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0answers
53 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 ...
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0answers
176 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 ...
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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 ...
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0answers
35 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 ...
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0answers
146 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 ...