Questions tagged [hedge]

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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 ...
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1answer
104 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?
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1answer
40 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?
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1answer
165 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": $$\Delta(t) = c_x(t, S(t)) \text{ for all } t \in [0, T)\text{.}\tag{1}$$ ...
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1answer
102 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= \...
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1answer
87 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)?
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38 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 ...
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33 views

Confusion regarding hedge calculation

this might not be the most advanced question, but hopefully this is the right community. Suppose that we have an asset with return $R_a$, a respective benchmark with return $R_b$ and the risk-free ...
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1answer
81 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 ...
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1answer
190 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 ...
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56 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 ...
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190 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! ...
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40 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 ...
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1answer
218 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 ...
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4answers
118 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?
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1answer
110 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 ...
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1answer
226 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, ...
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1answer
421 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 ...
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1answer
338 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,...
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1answer
41 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 ...
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1answer
56 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 ...
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1answer
411 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 ...
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1answer
74 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?
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1answer
173 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 ...
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3answers
128 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 ...
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1answer
96 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 ...
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1answer
222 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: ...
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1answer
103 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 $K$, ...
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1answer
95 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 ...
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1answer
142 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). ...
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1answer
160 views

Effects of hedges on counterparty exposure used for RWA computation

In the context of Basel 2 requirements (BCBS128), how hedges affect the computation of counterparty exposure used in RWA calculation? Specifically, do hedges reduce the amount of exposure (EAD)? ...
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2k views

What exactly does shifting a barrier in a barrier option mean and how does it hedge delta?

How exactly is shifting the barrier to hedge delta implemented in case of barrier options. Is it just changing the barrier, if so, how does it hedge delta or is it making the barrier a range like a ...
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0answers
48 views

How do you hedge with delta futures if payment is unsure?

A Czech company has a payable of 1,5 mil EUR that has got a settlement at the end of the current month and at the same time it is expecting a payment of 1,5 mil EUR at the half of the current month ...
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45 views

Hedge cost Exotic payoff

For an exotic payoff with no analytical formula, the standard is to use MC simulation or solve a PDE. On the other hand the price should be the future hedge costs with the hedge ratios implied by the ...
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279 views

Break-even volatility for delta hedge portfolio

After simulating practical and theoretical PnL of a delta hedged portfolio on some data from the SPX500 under 0.15 management Vol I want to find the Vol which gives me an accumulated PnL of 0. ...
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2answers
69 views

Why is the yield return preferred to the price return for selecting hedges for bonds?

For evaluating a hedge for a bond, I noticed that we often look at the yield return correlation between the two instruments, instead of the price return. Why is that? To me, the price would make more ...
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0answers
70 views

Confused by Solution to the Expected Profit when Hedging an option using Implied Volatility (from Wilmott 2006)

Paul Wilmott on Quantitative Finance 2nd Ed (section 12.5.1) gives a solution to the initial expected profit when hedging using delta based on implied volatility as $$\frac{1}{2}(σ^2 - σ̃^2) \,\int_{...
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167 views

Usages of variance swap

I’m interested in variance swap. Considered from its feature, variance swap is used for betting the (historical) volatility of underlying asset. If we use it for hedge tool of Vega or Volga, does it ...
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2answers
820 views

Why do par-yield shifts grow faster across the curve than spot-rate shifts when looking at key-rates?

Consider the following 10y key-rate shifts of bond par yields and its implied shift of bond spot rates: Assume we have the key-rates for 2y, 5y, 10y and 30y. The y-axis is in basis points, and the x-...
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1answer
2k views

Long short equity hedge fund question

I have a question related to long short equity hedge funds. 1) What are some of the metrics used to perform risk analysis of long short equity funds on fund level? Volatility (standard deviation), ...
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151 views

Min variance Hedge II

In a paper from Energy Risk - "Delta hedging the load serving deal", the author shows how to calculate the min variance hedge for a portfolio of two underlying assets. I've added a picture of the ...
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1answer
117 views

Hedging against exchange risk

How does one hedge against any exchange risk? A Japanese exporter has a €1,000,000 receivable due in one year. Detail a strategy using a money market hdege that will eliminate any exchange rate risk. ...
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1answer
151 views

minimum variance hedge with stochastic processes

Problem set up: asset S: $$\frac{dS}{S} = \mu dt+\sigma dz$$ Hedged using a forward contract: $F = F(S,t).$ Hedge portfolio: $$P = S+nF$$ I want to find the variance of $dP$, and then minimize that ...
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83 views

What is the intuition to believe that a properly designed option can be dynamically hedged (just for the 1 stock case)?

I would always presume that the portfolio consists of 1 stock and 1 risk-free asset. And that the $r, \alpha,\sigma$ are all non-zero, but might be time-dependent. When I say "any" option, I am ...
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827 views

interview question : replication strategy of a betting game

Here is a question I found in a book I am not able to finish. Your help will be much appreciated! I also included where I have been so far. Q: Team A plays team B in a series of 7 games, whoever wins ...
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2answers
316 views

Two questions regarding cross-hedge

A company has to hold an underlying asset for one year and it is looking to use Brent Crude futures to hedge against changes in the underlying asset's price. Assuming there is no liquidity concerns ...
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105 views

Comparing Hedging Strategies

Say I am an American issuer, and I've issued some bond denominated in CAD. I've hedged the coupon by entering into an FX USD/CAD fixed for floating swap and I receive the fixed leg and pay floating, ...
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1answer
2k views

Calculating PCA hedge ratio for 3-leg spread

I'm wondering how can I find PCA hedge ratio for a 3-leg spread? I've taken the simple steps laid out in here. I've taken some treasury futures data for 2yr,5yr,10yr and ran the PCA. The first ...
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1answer
574 views

Deltas and CC Basis Swaps

How do I calculate the dollar impact of basis change for a portfolio of cross currency basis swaps which hedged loans/bonds? I am thinking it might have something to do with delta and tenors but I ...
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3answers
4k views

Credit Valuation adjustment (CVA) Hedges

I need to understand once CVA Desk has CVA number(Bilateral or Unilateral) for a Counterparty, how does it take hedge position. for Eg: if CVA charge for my bank to JPM is 100K Dollars. What does ...