# Tag Info

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It depends on your ETF. Some have synthetic exposure to the index sold by a sponsor (ie someone give them exactly the performance of the index) but this has a cost (a constant / deterministic drag on the NAV of your ETF which doesn't appear in your tracking error). Futures on the other hand have basis, are sensitive to changes in implied dividends and ...

2

This is going to vary country by country, since securities laws can differ quite a bit when it comes to securitizing. That is largely governed by the relevant accounting rules which outline what assets you can take off your books. Without a majority transfer of risk, the asset typically can't(and shouldn't) be securitized. Securitization is very ...

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You may not be able to reduce a position. Either because there is no liquid markets (for exotic and less transparent derivatives markets) or your position is to big to reduce at once (if you take on big positions versus an institutional client (e.g., pension fund) you may not be able to go to the market to reduce it all). Plus, the whole point of trading is ...

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If you are investing an amount $M$, split over deals indexed by $i$ and with a weight $w_i$, then your dollar position in each share will be $w_i M$. The exposure to the index will be $\sum \beta_i w_i M$ You should realize that this will not hedge idiosyncratic risks. In general, the more deals you have, the better this type of hedge should work (assuming ...

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There are two things: First: You have one stock of $B$ (worth \$30) and the calculation tells you to short 1.14 stocks of$A$. Of course you can only short whole stocks. So you would have to decide wether to short 0,1 or 2 stocks. This is a question of contract size, or in this case just size. Second: Usually we speak about hedging in portfolio context. In ... 1 My 10 cents: Yes, the EUR is trading at a discount to USD. Think 100 - 2.8 = 97.2 for EUR, whereas 100 - 1.5 = 98.5 for USD so EUR is at a discount to USD. The calculation of premium and discount is in the forward pips. In your case it's spot - pips = forward 1.3195 - 0.0195 = 1.3000 So yes, the EUR cost in 6 months is$2500 / 1.3 = €1923.07 you agree ...

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I think u can hedge using the description given in JC hull.. here he uses index futures. A detailed explanation is given for one stock. I think u can extend it to a portfolio. Also one can hedge by combining two or three stock indices. See page 33 in this link http://www2.fiu.edu/~dupoyetb/Financial_Risk_Mgt/lectures/Ch03.pdf

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The "not too techincal" term is the protective put. It usually applies to buying 1 put per 100 shares of stock owned, but you can explain that you hedge less, if you don't put on the full protective put. The technical term is delta hedging. I have used this term with less sophisticated clients after I explained what it meant.

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If you are already long the stock, the way to hedge that risk is to go long a put and short a call, or what we call a option collar. This is also know as a "hedge wrapper" if you are trying to go for the marketing buzzword. Per Investopedia: The purchase of an out-of-the money put option is what protects the underlying shares from a large downward move ...

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In general, if one can create a portfolio with the same payoff as the derivative, their prices must be equal. This is also called "Law of One Price". Here an excerpt from my script: Here EMM = Equivalent Martingale Measure (Q), NA = No-Arbitrage.

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Is the one in red supposed to be the proof of the Pricing Principle 1? Or merely an intuitive explanation? It is not a proof. The explanation/reasoning in this paragraph lets the author state the pricing principle. It has hints on how to prove Prop 2.9 (for instance, see the line ...no difference between holding the claim and the portfolio...). If ...

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Only certain aspects of the risks that you bear in power markets given exposure to variable quantity swaps can be hedged. To your point, you have to have some expectation of what the load will look like. Even if you immediately go out and buy power against this expected qty you are subject to the risk that the load will deviate from said qty. There is no ...

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Some techniques I can think of include Use a brownian bridge to get a crossing probability for points near the boundary Use implicit stepping in your PDE solver (which increases smoothness) as opposed to explicit stepping (which "rings" near discontinuities) Employ control variates, by using the same grid to price related instruments having easy analytic ...

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I think you misinterpreted what you read. The whole point of the frictionless market assumption is that you can forget about any cost or any bound on volumes or latency associated with transactions used to rebalance a self-financed portfolio. So you are right when you say that sustaining a replicating portfolio doesn't cost anything. This implies that ...

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You sell your stock $S$ against some cash.

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If the stock you'd like to hedge with is the same as the option's underlying obviously just find the net delta and hedge with that amount of stock. If you have different types of stocks and would like to hedge with an index you can multiply the delta with the beta of each stock versus the index. Beta is analogous to delta in a way. With delta we describe ...

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Strictly speaking a vanilla swap is not really a derivative instrument, and vanilla swaps are often considered linear products. Having said that, there are a host of non-standard swap contracts on a myriad of underlying contingent assets which would make the swap qualify as a derivative non-linear instrument. Short answer is that it completely depends on ...

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One aspect you seem not to have so far considered is the ability to trade OTC spread options. A gas-fired power plant is naturally exposed to the "spark spread" (the difference between the market price of a unit of power and the cost of the gas required to produce that power). These are traded OTC between utilities, banks and standalone energy traders and ...

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