Timeline for Quantifying Costs/Benefits Of Partial Hedging
Current License: CC BY-SA 4.0
17 events
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| Jun 5 at 22:03 | history | edited | Arshdeep | CC BY-SA 4.0 |
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| Jun 5 at 21:50 | comment | added | Arshdeep | Please look at edits, still think best approach is to plot residual variance and parametrize it. | |
| Jun 5 at 21:48 | history | edited | Arshdeep | CC BY-SA 4.0 |
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| Jun 5 at 12:05 | history | bounty ended | Mild_Thornberry | ||
| Jun 5 at 12:05 | vote | accept | Mild_Thornberry | ||
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| May 31 at 22:43 | history | edited | Arshdeep | CC BY-SA 4.0 |
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| May 28 at 15:35 | comment | added | Arshdeep | I'll take some time to respond, but I will get back to you @Mild_Thornberry | |
| May 23 at 13:03 | comment | added | Mild_Thornberry | Ok, I’m convinced. With all vol equal to zero, remainder is just theta, or the cost of carry, since my option has effectively turned into a forward when there’s no vol. So hedge costs are estimated by removing associated vol of the risk. But then this gets me to pt2 of my question: how do I determine that hedge’s benefit in any scenario at maturity? I paid X dollars up front (depending on my % hedged), and need to fund Y% of my payout at maturity. | |
| May 22 at 20:43 | comment | added | Arshdeep | The difference in price given by the models is the correct difference in cost of hedging in the two models. The difference represents additional cost over and above what would be if the dynamics were deterministic. You can start with a one step binomial model and change the volatility and see how the cost of hedge moves. | |
| May 22 at 20:05 | comment | added | Mild_Thornberry | Intuitively, this makes sense. A rho hedge reduces your portfolio's rate vol to 0, so the price difference is your hedge cost. A vol hedge reduces your portfolio's vol of vol to 0, so the price difference is your hedge cost. But what about a delta hedge? A delta hedge should reduce your portfolio's equity vol to 0. If your spot is equal to your discounted strike, you'd still have the delta hedge cost of (F-K)e^(-rT). That is, dynamic delta hedging isn't just the difference between a constant and stochastic model. Is that wrong? It makes me question the intuition of the other risks as well. | |
| May 22 at 15:05 | comment | added | Arshdeep | Thank you for the clarity. In the case you are mentioning, the adjustment of the price should be the price under a stochastic rate+vol model minus the price under a deterministic model. | |
| May 22 at 14:23 | comment | added | Mild_Thornberry | This isn't quite what I was looking for. I was more asking if there was a clear analytical/formulaic relationship. For instance, in a constant rate/vol environment, Hull shows that dynamic delta hedging will "cost" you your option value. How do those costs break down in a stochastic rate/vol environment, and is there a way to connect those costs with your initial option value and final payout you're hedging? | |
| May 22 at 1:10 | history | undeleted | Arshdeep | ||
| May 22 at 1:10 | history | edited | Arshdeep | CC BY-SA 4.0 |
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| May 22 at 1:04 | history | deleted | Arshdeep | via Vote | |
| May 22 at 0:52 | review | Low quality posts | |||
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| May 22 at 0:31 | history | answered | Arshdeep | CC BY-SA 4.0 |