Questions tagged [hedging]

[Think of it as insurance. When people decide to hedge, they are insuring themselves against a negative event. This doesn't prevent a negative event from happening, but if it does happen and you're properly hedged, the impact of the event is reduced. So, hedging occurs almost everywhere, and we see it everyday.](http://www.investopedia.com/articles/basics/03/080103.asp)

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45 views

How to gamma hedge and vega hedge an autocallable product?

I am pretty new in quantitative finance, and I am interested by the hedging of autocalls. Could you, please explain which financial products should be traded (specify the way, please) to delta hedge, ...
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Cash account growth in Burgard & Kjaer (2011)

I am rereading [1] and there is something I cannot get my head around this time. In Section 3, page 6 of the paper, they derive the growth of the cash account when the hedging portfolio includes the ...
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50 views

understanding Greeks Hedging?

I know what the greeks (delta, gamma, thetha, etc.) mean in options, but could someone clearly explain how can someone hedge them? I hear delta hedging a lot, but it is difficult to put it on the ...
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My issue with hedging [closed]

So when I first learned about hedging strategies -- strangle, straddle etc...I thought "if these strategies are perfect, why would anyone lose money?" FYI I first learned about them during the GFC. ...
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Why aren't ETNs always listed with an inverse ETN?

Exchange Traded Notes (ETNs) are often issued to give buyers exposure to an index that cannot be easily constructed from liquid securities. (If an index can be constructed from liquid securities it ...
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Hedging with a different underlying - bond options case

I'm working on government-bond options pricing (Black-Scholes world, nothing fancy). In EUR, that's pretty much a "non market" in the sense that there's pretty much no quotes, so no implied vols, no ...
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68 views

Delta heding & PnL

Sorry if it's a duplicate but i didn't find an answer to my simple question in the other posts. Let say we short a call option on a stock. $K = 100$, $C = 1$, $S = 100$ and $\Delta = 0.5$. No ...
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165 views

Why is the hedging cost using forwards $\frac{F-S}{S}$ and how is this related to Carry?

I'm a bit confused about hedging a foreign exposure and how this is related to carry. I've read that the hedging cost $h$ is $$h=\frac{F-S}{S}$$ where $F$ is the forward and $S$ is the spot price. ...
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How do FX brokers decide to hedge or book a customer's trades?

FX brokers try to be more profitable by, - booking(b-book) the traders that are predicted to be losing money according to the trader profile or trading history. so, if the customer loses money, the ...
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Hedging with implied volatility

I am reading this article by R. Ahmad and P. Wilmott: Which Free Lunch Would You Like Today, Sir?: Delta Hedging, Volatility Arbitrage and Optimal Portfolios Let $V^{i}$ the market value of an ...
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Hedging Strategy for European Call Option (Single period Binomial Model)

I am hoping to gain some insight to an exercise from my undergraduate Mathematics of Finance class. (This is my first course ever in finance, so bear with me.) The exercise is: Consider a single ...
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What are Market Makers hedging?

I know that the target of the market makers is to provide liquidity to the markets. Right now I'm working as a developer in a quite large project of F.I. I know that they are providing liquidity for ...
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50 views

Deriving investment amount for one asset of a two asset minimum-variance portfolio

Suppose I bought $100 worth of stock A and I want to hedge it by shorting stock B, they have correlation of rho and respective standard deviations. How do I know how much of Stock B to sell? that's ...
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45 views

EBA Stress Test Arbitrage

The EBA stress test defines specific shocks to yield curves that are applied to positions as at year end. There is no account for cashflows - it is simply an immediate shock. Suppose the interest ...
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48 views

How to hedge payments in a foreign currency?

I´m confronted with solving the following exercise: "Suppose that now is 1 March. You are a UK based exporter who´ll export products to a U.S. company for 250,000 US dollars and to a French company ...
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Hedging the duration and convexity of a bond portfolio

I'm trying to work through this homework question, but not sure how to approach it. You recently took over as the manager of a bond portfolio. Your total assets under management – all consisting of ...
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86 views

Hedging a trade for PCA component neutrality

Suppose I am given a set of financial instruments, e.g. {1Y, 2Y, ..., 30Y} interest rate swaps or {Barclays, Lloyds, .. } FTSE100 companies. It doesn't matter which so let's go with IRS. I have ...
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Hedging option delta

Let's say I am long 1000 50 delta call options. I need to hedge my deltas now. There can be infinite ways to do this. How should I think about proceeding wit this? My first thought was, if the ...
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51 views

Why does the price of a butterfly spread increase are rate exponential [closed]

I know that stock prices are assumed to be Stochastic processes that follow Geometric brownian motion. The expectation of stock prices at time T given stock price at time 0 is: $e^{-rT}S_0$. However, ...
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102 views

Replicating portfolio with stock, bond and call option

I am trying to interpret: I am having trouble interpreting the replicating strategy: Context: $\phi$ is a generic payoff function, 0 < S < $\infty$, assumed throughout to be twice ...
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Hedging a long position-one period from Steven Shreve Stochastic Calculus for Finance

The following question is taken from Steven Shreve Volume 1, Chapter 1, Exercise $1.6$ (Hedging a long position-one period) Consider a one period binomial stock model with $S_0=4$, $S_1(H)=8$ and $...
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42 views

Spread option static replication

I have a methodology for hedging a spread option but not sure if it makes any sense, or if I can do any better. Happy to hear your advice! Suppose you have a spread option paying off $P_T(r_T,s_T)=(...
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81 views

Which currency to hedge a position in FX options?

Let's assume a bank sells to a client a put of \$1,000,000 dollars on USDJPY at 110 in 6 months. The delta of this put is -0.6, spot is 112. So to hedge its position the bank has to short \$600,000 ...
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90 views

Delta hedging: theoretical value vs actual price

One way to derive the Black-Scholes PDE is via the Delta-hedging argument: Suppose that $V_t = V(t, S_t)$, for some function $V: [0,T] \times \mathbb{R} \to \mathbb{R}$. We construct a portfolio by ...
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FX TARF hedging (target redemption forward)

Lets say client is buying from you eurusd tarf strike 1,16 sell eur buy usd notional per fixing 500k usd leverage 2 first expiry 1 month from now, 12 fixings in total (monthly) full final payout ...
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what is the state of the art method for hedging barrier options?

I want to create my own Barrier options for some security, I want to trade. I did some literature review, and found a static replication method, and many dynamic replication methods. I want to know ...
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HEDGING WITH A PUT OPTION

In the following example, for 3rd question and 4th question why do we have to add (Stock price in three months - Current stock price) to put option profit? Thank you in advance.
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202 views

How to adjust delta hedging if stock price decreases?

Question: You are long a call option no MITCO stock. You have delta hedged your position. You hear on the radio that the CEO of MITCO has just been arrested for running a massive Ponzi scheme. The ...
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Do not understand 'The gain (loss) on the stock position would then tend to offset the loss (gain) on the option position' [closed]

Currently, I am reading John Hull's Options, Futures and Other Derivatives. On page 401, the author mentions the following: Suppose that the delta of a call option on a stock is $0.6$, stock price ...
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Simple 3 way delta hedge

Consider 3 futures contracts: A BTC/ETH, settled in BTC B USD/ETH, settled in ETH C USD/BTC, settled in BTC As the markets aren't efficient, sometimes these ...
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115 views

Using cumulative returns to hedge against the overall trend

I am curious about a hypothetical strategy where you are long for a given period (like a year), and at the same time you hedge against the overall trend by going short everyday and accumulating the ...
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68 views

Optimal Hedging of Options - asymmetry between long and short vol positions

Going over Zakamouline's Approximation method for optimal delta hedging of options, it is claimed that the result remains valid for both buying options (long vol positions) or selling options (short ...
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How to price, hedge ESG-dependent products?

I read with interest news about Netherlands bank trading several novel products in which a counterparty pays floating cash flows linked to the counterparty's ESG (environment, social, governance) ...
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Hedging Strategies involving Forwards and Options [closed]

"An investor or business with long exposure to an asset can hedge exposure by either entering into a short futures contract or by buying a put option. An investor or business with a short exposure to ...
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1answer
324 views

Classic dynamic delta-gamma hedging in Python

I am trying to run a delta-gamma hedge for a Black-Scholes model in Python.The Euler disceretizatioin of the paths is the simplest possible. I wrote the code below but the PnL looks undesirable and ...
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80 views

Hedging convexity for long-dated fixed cashflows

I'm wondering what are the different ways of hedging the convexity in fixed long-dated cashflows (maturity > last liquid point). Also, if you'd say receiver swaptions would be the way to go, could you ...
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148 views

evaluation of option pricing models based on Greeks empirical hedging effectiveness

I’ve studied many different pricing models (B&S, Vasicek, CIR, Merton jump, Heston, ecc), each of them gives as output a different price and different values for the Greeks. So, for example, if ...
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113 views

To calculate the Hedge Efficiency and Optimal Hedge Ratio with BEKK in R

I estimated an MGARCH-BEKK model (using the R package BEKK, i.e. Baba, Engle, Kraft and Kroner; see Engle and Kroner (1995)) on time series of spot and futures ...
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Why is the CAPM Beta defined this way - Beta hedging

Let's say I have two equity indices X and Y. Assume they are negatively correlated with some leverage. I want to hedge X with Y. I have seen many ways of computing a beta to describes the ...
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107 views

How do I derive a blend of a 3Y future and 10Y future risk?

So I have a portfolio of Govt. bonds that I'm trying to hedge with futures. Let's take one of the bonds out of the portfolio as an example. In bloomberg, every bond and its future counterparts has a ...
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70 views

stochastic interest rate in binomial pricing model and in continuous models

Is the interest rate allowed to be truly stochastic in the binomial pricing model and in continuous models so that we are still able to switch to the risk-neutral measure? Shreve mentions multiple ...
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218 views

Currency Hedged Excess Return

In the famous article "Global portfolio optimisation" of Black and Litterman, the authors defined the excess return on currency-hedged assets as the following : $$ E_t = 100 \frac{P_{t+1}X_t}{P_tX_{...
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134 views

Market Maker ETF Hedging Strategy

Some thoughts about ETF hedging; feel free to leave comments! Scenario 1: An investor sells 1M ETF shares to a Market Maker(MM) at bid price. MM has a long position and will need to offload the ...
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109 views

Cash Flow Hedge Accounting

In the context of hedging a fixed rate foreign currency liability with a receive-fixed pay-fixed CCS is known that in order to assess the effectiveness of a cash flow hedge the ratio of the change in ...
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1answer
63 views

Framework for hedging fx and utilizing correlation between asset returns

Can anyone point me in a direction (research paper, books, ..) which developes a framework/strategy for hedging currency exposure for an international bond portfolio? This paper finds optimal ...
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51 views

Books and techniques to hedge options that expire tomorrow?

Can anyone point me to books or resources that talk about best techniques to hedge ATM or close to ATM options that expire tomorrow. I am particularly interested on how to hedge if you are short the ...
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44 views

Equivalent of recovery rate

I'm trying to understand the functioning of "recovery of face-value" approach. Let $V_t$ the fair-value, that is the price that the holder of a defaultable bond must pay for hedging of default of ...
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How to properly hedge a short vol taking into account hedge stop loss?

Suppose a short straddle. In practice, hedging with long/short futures exposes to the risk of hitting a stop loss when market movements are wide. Eventually, it may very well happen that the hedge ...
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2answers
337 views

Model calibration volatility surface

Let's say i have an exotic structure that is to be vega hedged dynamically. I choose to price it with a local volatility (which means the model prices in your future vega hedges using all options for ...
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44 views

Vega computation in a stochastic volatility model

What are the possible strategies to compute analytically the Vega (not numerically) in a stochastic volatility model? The goal is to vega-hedge in a generic stochastic volatility model if possible, ...

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