# Tag Info

3

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

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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It depends on how one is thinking about the hedge. One might be thinking of it as A hedge against catastrophic risk (default of the issuer), or A hedge against changes in (market-implied) default intensity or hazard rate In the former case, which seems to be how you are considering it, the hedge is a static hedge, kept for up to 5 years, and insulates ...

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Most index options are options on futures, so to delta hedge a single option position, you trade the corresponding future. For example, say you sell 10 delta 50 calls on the CME Emini S&P. To delta hedge them, you'd buy 5 CME Emini S&P Futures with the same expiry date as the options. As you say, you could hedge with the basket instead, but for ...

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This sounds like quadratic hedging. If you have the return of the assets $r_X$ and $r_Y$ with negative correlation $\rho$ between the two (we could think of bonds and stocks) and more variance in one of them then the problem of weighting the two by $w$ is (assume zero expected returns for ease of presentation)  \text{risk} = E[(w r_X + (1-w) r_Y)^2] ...

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I am not sure I fully understand your question. Options it just derivative contracts (wager) between two parties, there is no ‘real’ assets bought to support the +/- value change the option might have during its duration. When the exercise date is upon the option, and you are the winner, you are paid according to the WAMC of the index – e.g. 3.4% of your ...

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This is a much simpler problem than stated, (assuming the correlation is positive). In 1 month you need to BUY 2mn of jet fuel. If Jet fuel prices go up, you lose money as it's more expensive. If jet fuel prices go down, you make money as it's cheaper. So to "hedge" your risk you will LONG the heating oil, as you are not in the business of speculating on ...

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In the Merton jump diffusion model, the stock price process consists of a continuous part and a discrete part (this one represents the jumps). While deriving the PDE for the riskless portfolio and imposing the riskless evolution, the discrete part can't be instantaneously hedged. In fact, you can assume that the effects of jumps can be nullified on average, ...

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I am a professor too and I did work with Siemens Corporate Technology which provides the quantitative technology for their copper and electricity trading (Siemens being one of the biggest players in this area in Europe). They are mainly using sophisticated neural networks. We also published a paper together, see my answer here: What types of neural networks ...

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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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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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