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4 votes
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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 ?
McCruise's user avatar
0 votes
1 answer
108 views
+100

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'...
Mild_Thornberry's user avatar
0 votes
0 answers
40 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)?
wer_asd24's user avatar
0 votes
1 answer
75 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 ...
sjedi's user avatar
  • 23
0 votes
2 answers
90 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 ...
ChairmanMeow's user avatar
0 votes
1 answer
99 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 ...
bobbel's user avatar
  • 103
0 votes
2 answers
361 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 ...
Ouissem's user avatar
0 votes
1 answer
70 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, ...
abstract's user avatar
0 votes
0 answers
78 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 ...
Landscape's user avatar
  • 548
0 votes
0 answers
174 views

How to hedge 3 Month SOFR futures with 1 Month SOFR futures considering FOMC meeting

Has anyone considered trading SR3 vs SR1 SOFR futures? They both have the same underlying basis of daily SOFR, and how would one calculate a hedge ratio for the SR1 to trade along SR3? Looking at the ...
Borla312's user avatar
0 votes
1 answer
58 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]...
Don P.'s user avatar
  • 103
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0 answers
40 views

Hedge for some exotic options

It is well known that a european call option with strike price $C(K)=(S_T-k)^+$ coul be hedge using the Black-Scholes formula $BS(t,T,r,K,S_0)$. I would like to find a hedge (or sub-hedge) of the the ...
Don P.'s user avatar
  • 103
0 votes
1 answer
262 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 $\...
Vanconts's user avatar
0 votes
1 answer
113 views

Quantlib Vanilla Swap Amount not based on Forwards

I have the following code: ...
lieweHenksie's user avatar
0 votes
0 answers
132 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 ...
tweedi's user avatar
  • 527
1 vote
3 answers
183 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 ...
Giova Next's user avatar
0 votes
0 answers
69 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{-...
Carlos Navarro Astiasarán's user avatar
1 vote
1 answer
131 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 ...
DLW's user avatar
  • 55
0 votes
0 answers
61 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 ...
Landscape's user avatar
  • 548
2 votes
1 answer
209 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 ...
SuavestArt's user avatar
2 votes
0 answers
183 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 $...
user60304's user avatar
0 votes
0 answers
361 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 ...
Lookout's user avatar
  • 257
0 votes
0 answers
163 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 ...
user58876's user avatar
0 votes
1 answer
1k 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?
jeheran sankti's user avatar
-2 votes
1 answer
56 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?
s00rz's user avatar
  • 1
2 votes
1 answer
382 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": $$\Delta(t) = c_x(t, S(t)) \text{ for all } t \in [0, T)\text{.}\tag{1}$$ ...
user54908's user avatar
  • 437
1 vote
1 answer
517 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= \...
user54811's user avatar
1 vote
1 answer
135 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)?
MainCom's user avatar
  • 281
0 votes
0 answers
87 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 ...
TangoW's user avatar
  • 1
1 vote
1 answer
186 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 ...
Sebastian Strauss Hansen's user avatar
2 votes
1 answer
314 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 ...
pappu's user avatar
  • 139
1 vote
0 answers
146 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 ...
ecxnfmdnamdnrnrm's user avatar
2 votes
0 answers
768 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! ...
Randor's user avatar
  • 796
0 votes
1 answer
136 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 ...
user52091's user avatar
1 vote
1 answer
638 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 ...
ExoticBirdsMerchant's user avatar
0 votes
4 answers
171 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?
James Bowery's user avatar
1 vote
1 answer
145 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 ...
Ouadia's user avatar
  • 65
0 votes
1 answer
591 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, ...
Watchung's user avatar
  • 111
1 vote
1 answer
902 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 ...
japanese accountant's user avatar
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,...
Van Tom's user avatar
  • 143
0 votes
1 answer
64 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 ...
short_vol's user avatar
1 vote
1 answer
100 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 ...
macro123's user avatar
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 ...
HJA24's user avatar
  • 35
1 vote
1 answer
128 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?
Dat Tran's user avatar
  • 111
2 votes
1 answer
364 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 ...
Gogo78's user avatar
  • 636
0 votes
3 answers
176 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 ...
tweedi's user avatar
  • 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 ...
curious's user avatar
  • 1,037
1 vote
1 answer
430 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: ...
simsalabim's user avatar
1 vote
1 answer
116 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 $K$, ...
 sai murari's user avatar
1 vote
1 answer
180 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 ...
A.L. Verminburger's user avatar