Questions tagged [hedge]
The hedge tag has no usage guidance.
80
questions
-1
votes
1
answer
54
views
Conversion Factor Weighted or Dv01 Weighted Treasury Futures Hedge
When trading the US Treasury Basis, why is a conversion factor weighted number of futures to your bonds the convention over DV01 weighted number of futures? why does one prefer the conversion factor ...
4
votes
2
answers
642
views
How do banks hedge their FX TARF trades?
How do banks hedge their Target Redemption Forward trades?
How effective are these hedges?
How profitable are TARFs from the selling side ?
- 43
0
votes
2
answers
211
views
Quantifying Costs/Benefits Of Partial Hedging
Say I sold a long-dated European put option and I want to analyze the costs and benefits of partial hedges in a world with stochastic price movements, rate movements, and volatility. For example, let'...
- 755
0
votes
0
answers
56
views
Treasury Futures Roll Hedges
When you trade the US Treasury futures roll, why do you hedge with SOFR futures contracts for TU and FV and why do you hedge the stub (with SER futures weightings)?
0
votes
1
answer
149
views
Minimum variance hedge ratio for currency hedging
The textbook formula for minimum variance hedge ratio (MVHR) is correl (Y,X) * (STDEV Y / STDEV X)
However, I would like to reconcile the textbook formula with the ...
- 25
0
votes
2
answers
239
views
Producing hedge ratios via regression via returns and not price
I'm a quant student and I need someone to clearly and plainly explain to me better than my professor did about this topic. Please be patient if my question seems very basic.
to find hedge ratios or ...
0
votes
1
answer
102
views
Formula 4.10 in Volatility Trading by Sinclair
I'm reading "Volatility Trading" by Sinclair and am confused about formula 4.10. I hope someone of you can enlighten me :)
What he's saying there is that he purchases a call option and wants ...
- 103
0
votes
2
answers
754
views
Pnl on delta hedged option
When we sell an option and we hedge it using Delta, we replicate the option payoff until maturity according to its Delta.
If we replicate the option perfectly and with high frequency, we should be ...
- 1
0
votes
1
answer
84
views
Simple Beta Neutral Intuition in Pairs of Two Assets
I'm having trouble understanding the intuition of a simple beta hedge using a linear regression.
Assuming an asset has a beta of 0.5 against the market. That implies for a percent move in the market, ...
- 35
0
votes
0
answers
81
views
Why are we so focused on Zero Coupon Bonds?
In fixed income markets there seem to be two prevailing term structure modelling approaches:
Market Models
HJM Framework
In Market Models, such as the LIBOR Market Model (LMM) and SABR it is common ...
- 558
0
votes
1
answer
69
views
Hedge up-knock-in forward option
I wolud like to know if there is an analytic formula to to valuate a up-knock-in forward, it means
\begin{equation*}
(S_{H_B}-S_T)1_{[H_B\leq T]}
\end{equation*}
where $H_B=\inf[t\geq0 | S_t=B]...
- 103
0
votes
1
answer
374
views
Calculating the Minimum Variance Hedge Ratio [closed]
Taken from the book:
$\Delta{S}$ - Change in spot price, S, during a period of hedge.
$\Delta{F}$ - Change in futures price, F, during a period of hedge.
If we assume that the relationship between $\...
- 3
0
votes
1
answer
124
views
0
votes
0
answers
145
views
Adjusted beta for short positions, should we re-adjust the formula?
I see in BBG that the beta of XSPS (an inverse SP500 ETF) to SPX Index is -1.05 and the adjusted beta is -0.37.
I get that -1.05 * 2/3 + 0.33 matches the adjusted beta. However, does this adjusted ...
- 527
1
vote
3
answers
226
views
Uncorrelation between SP500 and USDJPY?
I'm planning to start a strategy on SP500 hedging losses on USDJPY, because USD usually goes the opposite of SP500. I'm also considering other symbols (USDCAD, USDCHF, USDX) I just took the charts of ...
- 11
0
votes
0
answers
72
views
Hedge position formula interpretation
I've been given a formula that has to do with the calculation of hedge position, but I'm struggling to understand it. I'm really new to financial Maths or financial in general.
The formula is: $\frac{-...
1
vote
1
answer
142
views
Hedging with peer companies and optimize the weights
I am trying to long a security that is expected to outperform its peers after certain corporate actions, but want to hedge using the same group of peers (so short ~5 names). So the goal here is to ...
- 75
0
votes
0
answers
63
views
What is the P-probability of an unhedged call-arbitrage to lose money at expiration
Assume that the Risk Neutral Price (under the $\mathbb{Q}$-measure) of an European Call Option with expiration date $T$ has a price of $F(S_0,0)$ at time $t=0$ in the single asset Black-Scholes model ...
- 558
2
votes
1
answer
253
views
Hedging exchange rate risk from ADR with FX Forwards
Is there a more efficient way of hedging exchange rate risk from ADRs instead of constantly trading FX Forwards? How does the industry usually hedge that risk?
Moreover, is it reasonable to suppose ...
- 525
2
votes
0
answers
192
views
In the Black-Scholes model with stochastic interest rates, what are the 3 assets used to compute measures?
Suppose I have a model with 2 primary assets, a stock $S$ and a short rate.
The stock will be driven by a Brownian motion $W_1$. The short rate will be random and will be driven by a Brownian motion $...
- 51
0
votes
0
answers
395
views
hedge with implied volatility, PnL formula
Notations are consistent with this answer.
Selling and delta hedging the option $V^i$ using the implied volatility $\sigma_i$ while the actual volatility of the underlying asset is $\sigma_r$. Then ...
- 257
0
votes
0
answers
183
views
Hedging Curve Risk with Futures
Please help confirm/correct my understanding of hedging curve risk using futures.
For example, if I purchased a 9y bond and hedged the duration risk (parallel shift) by shorting 10y treasury futures ...
0
votes
1
answer
2k
views
How to get the weights for a beta neutral portfolio?
Given a ranking of 100 long stocks and 100 short stocks. Looking at these 200 betas: How can I find the optimal weights to get a beta = 0 long/short portfolio?
-2
votes
1
answer
59
views
Hedge 3 securities against 3 other securities
I have a portfolio of 6 securities, 3 long 3 short. I need to hedge them against each other so directional exposure = 0. How would I decide how to weight each security?
Is there a model to do this?
- 1
2
votes
1
answer
411
views
For what options does the "delta hedging rule" apply?
I'm reading Shreve's Stochastic Calculus for Finance, Volume II. In chapter 4, he derives the "delta hedging rule":
$$\Delta(t) = c_x(t, S(t)) \text{ for all } t \in [0, T)\text{.}\tag{1}$$
...
- 437
1
vote
1
answer
597
views
Conversion factor for futures hedging?
I had a question regarding conversion factors and treasury futures in the context of hedging for DV01.
In my textbook, in order to calculate the hedge ratio they give this formula:
$$
HedgeRatio= \...
- 11
1
vote
1
answer
142
views
SX5E option hedge
There are only quarterly contracts (3,6,9,12) for SX5E futures. In practice, how do we hedge SX5E option at expiry for non-quarterly contracts (say April)?
- 281
0
votes
0
answers
95
views
Hedge Fund Leverage - FX exposure
how is leverage calculated for hedge funds that follow a global macro strategy. Specifically interested in knowing the FX exposure- forwards or spots. If it’s just Longs+Shorts, then leverage would be ...
- 1
1
vote
1
answer
213
views
Hedge error - Willmot and Ahmad
I'm currently reading the paper: Willmot and Ahmad: Which free lunch would you like today, Sir? Delta Heding, volatility arbitrage.
In case 1: They delta hedge with the actual volatility, by going ...
2
votes
1
answer
338
views
Pros and Cons of SPY hedging strategies
Imagine someone bought 100K SPY as a long term investment. Now he wants to hedge against the downside risk of 10% or more. He is considering the following options:
Buy UVXY which is a 1.5X VIX ETF ...
- 139
1
vote
0
answers
159
views
Market maker hedging model
I understand that most market makers maintain non directionality i.e. they always aim to be perfectly hedged. So if they take a long position in X, they will take an offsetting short position in a ...
2
votes
0
answers
882
views
how do traders typically hedge a callable zero coupon bond?
i've seen termsheets of callable accreting notional swaps where the accretion rate equals the fixed coupon rate. apparently these are used to hedge callable zcb's. but it doesnt seem to make sense! ...
- 796
0
votes
1
answer
155
views
ETF bid/ask spread [duplicate]
I was just wondering if someone could explain to me how an ETF market maker earns profit through the spread they collect while hedging the positions to be non-directional.
For example I read somewhere ...
1
vote
1
answer
671
views
Meaning of Rebalancing the Gamma in Options?
What does rebalancing the gamma mean?
In the Book: Dynamic Hedging at the beginning says:
Rebalancing the gamma corresponds to buying and selling the underlying security in order to replicate the ...
0
votes
4
answers
178
views
Where can I find a current tail risk indicator?
The definition of tail risk (risk of 3-standard deviations movement) seems to imply there would be a current market indicator for this.
Is there such an indicator available somewhere?
- 103
1
vote
1
answer
150
views
Structured Trade / Hedge consistency
I have a question regarding the marking consistency (from an accounting point of view) between bespoke structured trades and the listed instruments that may be used for their hedging purpose:
Since ...
- 65
0
votes
1
answer
649
views
Gamma and Gamma Hedge [closed]
I have a very basic question: Is this gamma value has something to do with the gamma hedge? In delta hedge, it's done by buying/selling delta amount of underlying. But in textbook, for a put option, ...
- 111
1
vote
1
answer
1k
views
IFRS9 hedge accounting - fx risk hedge with Cross currency swap with notional reset
My understanding is that notional resetable cross currency swaps (MTM CCS) are very common amoung interbank markets, and MTM CCS are often used to hedge fx exposure.
However, the notional resettable ...
4
votes
1
answer
1k
views
Pricing of autocallable structured product
I'm looking at this paper: https://doi.org/10.1057/jdhf.2011.25, which is on pricing autocallable structured product. The author uses the Black-Scholes equation to describe the product's dynamic value,...
- 143
0
votes
1
answer
66
views
Hedge Active Duration by Issue Currency or Country of Risk
For example, lets say I own a bond issued by a company in Mexico that's denominated in USD and I want to hedge my duration exposure. I obviously need to hedge duration to the US yield curve. Do I ...
1
vote
1
answer
103
views
Minimum Variance Hedge Ratio and Risk Capital Relation
So I understand that the minimum variance hedge ratio minimizes the second moment of the portfolios. My question is how is it related to the size of the risk capital (which is calculated as the Value ...
- 31
2
votes
1
answer
1k
views
Price adjustment of Black-Scholes delta and gamma for a quanto option
A quanto option is a derivative with the underlying and strike price denominated in one currency, but the instrument itself is settled in another currency. This has consequences for the calculation of ...
- 45
1
vote
1
answer
131
views
Hedge ratio with future contract [closed]
I want to buy some stocks and short future contract instead. I wonder whether I can calculate the hedge ratio?
- 111
2
votes
1
answer
396
views
Hedging with interest rate derivatives
This might be a stupid or basic concept for some of you, I'm new to the concept of hedging with interest rate derivatives, I understand how to hedge an equity portfolio but i'm struggling with the ...
- 656
0
votes
3
answers
193
views
Hedge performance in times of volatility: Beta changes impacting PnL during market rebound
I hedge a portfolio of Global Equities (200 stocks within MSCI World universe) by shorting futures on MSCI World Net Total Return. The hedge is calculated using Beta. Beta is calculated using a risk ...
- 527
0
votes
1
answer
107
views
How much to hedge if borrow in EUR to buy USD assets?
Suppose an investor borrows EUR1m to buy USD stocks. He wants to hedge away the currency risk through EURUSD futures. He should go long EURUSD to hedge this risk. The question is how much of EURUSD ...
- 1,037
1
vote
1
answer
446
views
Making portfolio Delta and Gamma neutral using 2 derivatives
We have an option portfolio with delta =2 and gamma 3 and we want to making this portfolio delta and gamma neutral using two derivatives D1 and D2:
...
- 57
1
vote
1
answer
117
views
Brownian motion Price and Hedge problem
Let $W_t$ be a Brownian Motion and let
$S_t= S_0e^{(rt- \frac{\sigma^2}{3!}t^3 +\int_{0}^{t}\sigma W_s ds )}$
Price and Hedge at time $t=0$ European call with maturity $T$ and strike price $K$, ...
- 33
1
vote
1
answer
217
views
What is the difference between Cost of Currency Hedging and the Price of a Currency Pair Forward?
I am looking at Reuters Datastream and all they seem to provide is the settlement price of the CME EURGBP contract (which more or less equals current spot).
But what does it actually cost me to ...
1
vote
1
answer
192
views
Hedge ratio: hedging a portfolio of global equities with futures
A bank decides to use $100 million of its capital to launch an investment strategy (seed money). The portfolio which is launched is made of global equities (say ~ 500 equities of different markets).
...
- 527