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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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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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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65 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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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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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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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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104 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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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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Understanding methodology behind the covariance bucket vega
I am reading "Dynamic Hedging" from Mr. Taleb. I understand that you cannot simply aggregate all the vegas of your option portfolio and classify this as the portfolio's vega. So, now I want to ...
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How should one hedge option positions on the date of expiry?
Let's say we are looking at a non-liquid equity ticker and a slightly OOM option on it. The problem is that if we buy delta to hedge it, it could move the underlying market and push the option to be ...
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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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Hedging with different volatility (Ahmad and Wilmott paper)
In their paper they show that:
- if you hedge with the realised volatility, the present value of the total p&l is the difference between the option value based on the realised volatility and the ...
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When should we delta hedge?
Let's say I'm the seller of a European call option on a non-dividend paying stock. I pocket the premium $c_0$ of the call at $t=0$.
If I start to delta-hedge right away, this is equivalent to ...
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38 views
does anyone calculate substitution risk?
So a company can post collateral to borrow money (repo agreement) and they may have different options of collateral to post. I have to pay a return on their collateral while I hold it. Since, at the ...
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1answer
79 views
Static hedge for up-and-out Digital Call
I am trying to come up with a static hedge for a Digital Call with strike K that knocks out when price > barrier H. I know it will involve non-knockout digital calls with strike K and strike H but I ...
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Implied Funding/Borrow Costs in Short-Dated ETF Option Prices
I'm struggling with some anomalous behavior in an analysis I'm running and was hoping for some advice/insights. I'm attempting to extract the implied funding/borrow costs from ETF option prices (say ...
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247 views
Delta Hedging/ Exchange for Currency Options
I'm looking at 2 cases of hedging EURUSD, using call spread or range forward.
Lets say spot is 1.1300 and my buy call is at 1.1300 and sell call is at 1.1500. Hypothetically I'm assuming that this is ...
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Interest Rate Futures Question from Hull, 8e
There is this question 6.16 in Hull, 8e:
Suppose that it is February 20 and a treasurer realizes that on July 17 the company will have to issue \$5 million of commercial paper with a maturity of 180 ...
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196 views
Replicating the square of an option $C^2 (S,K,t,T)$
Given a vanilla options market, i.e. $C(S,K,t, T)$ for all strikes $K$, is it possible to replicate $C^2 (S,K,t,T)$? So I am looking for a self-financing portfolio which has a price equal to $C^2(S,K,...
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Uniqueness of the Hedging strategy
I am currently reading the book "Nonlinear Option Pricing" by Julien Guyon. In the book they defined an attainable payoff $F_T$ as a $\mathcal{F}_T$ measurable random variable for which there exists ...
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42 views
How to hedge PLN account on Interactive Brokers
I know that you can't have PLN account on IB, the PLN input is exchanged into USD, GBP etc. currency. However I would like to hedge the other currency exposure against PLN, or at least find out how to ...
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186 views
How to hedge a perpetual barrier option?
I have encountered the following question during my interview: How to have a static hedging of a perpetual barrier up-and-out call option in practice? Strike K = 110, barrier B = 120 for example?
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106 views
Exotic option arbitrage
Suppose an exotic European option has a sub hedging (price being lower than the target) portfolio of vanilla European options all with the same expiry as the exotic option. The sub hedging portfolio ...
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135 views
Hedging strategy for American Option
Good day,
I was asked to devise a hedging strategy for an American Option given the following claims.
Note, $r=0$ and the underlying stock pays a dividend of $1$ at time $t=1.5$
\begin{...
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120 views
Principal Components Analysis on overlapping contracts
I am conducting several PCAs on the gas forward curves (months, quarters, seasons, calendars) for hedging purposes which give me some rather reasonable and stable results.
However, these contracts ...
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Creating a hedge portfolio out of 10 assets
Suppose I have historical return data on 10 assets. How can I create a hedge portfolio that prices all these assets in a factor model?
I have chosen 3 factors: excess market return, SMB and HML from ...
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3answers
177 views
Hedging a CDS sold
How would a bank that sold a CDS to a client hedge its position?
Is there a replication method similar to what is done with option hedging or other methods used?
Many thanks
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How to measure effectiveness of CDS hedging
In a fixed income emerging markets portfolio investing in Sovereign and Corporates, CDS on governement bonds are used for hedging credit risk.
To be clear CDS are used to hedge both the exposure of ...
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Formal proof market incompleteness under jump diffusion
Does anyone have formal proof of markets incompleteness under jump diffusion ?
I am familiar with the intuitive approach as mentioned in Tankov (delta), yet I am looking for a formal approach and ...
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2answers
192 views
Hedging treasury bond with Eurodollar futures
I was reading Interest Rates Markets by Jha, and on p. 214, he describes hedging a 5 year treasury bond with a ED future strip, as described below.
He says the best hedging quantity can be generated ...
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2answers
119 views
Greeks and options hedging
Why is it that theta is sometimes taken as the proxy for gamma of the underlying asset in options hedging?
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59 views
replicate option by dynamic hedging
I've just started working for a company with a decent commodity exposure. They manage this by as they call it dynamically hedging it.
Basically when they start the hedging they identify a market ...
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1answer
106 views
How can I approximate the hedge ratio for Inter Commodity Treasury Spreads?
Looking at the excellent CME Treasury Analytics tool, I can see that the hedge ratio for spreads betweend diff treasury futures is derived from the DV01 of each leg.
I can get treasury futures data ...
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FX Average Forward Pricing
Lookin for documentation on how to price FX Arithmetic Average Rate Forwards.
Couldn't find any info on textbooks.
Any help is very appreciated.
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423 views
Commodity Asian Swaps
I'm trying to find info about asian swaps on oil/energy products and about their pricing methods.
However, all I could find are on asian options.
Would be glad if you can provide me with some ...
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2answers
113 views
ETF Replication
I have a question regarding the ETF replication methods. I know there are two main methods, namely physical and synthetic replications, but I would like to understand how an ETF trader can :
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Who trades exchange options in practice (Margrabe's formula)?
I'm currently studying the pricing of the exchange option.
https://en.wikipedia.org/wiki/Margrabe%27s_formula
While I can appreciate the theory, who actually buys these options in practice? Are ...
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How to compute gamma for at-the-money regular calls and puts when they approach expiration to avoid explosion of portfolio's gamma?
When and at-the-money regular call or put approaches expiration, gamma tends to infinity. However, for practical purposes, there is only a finite change in delta. The problem is that if any of the ...
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205 views
How to hedge a short VIX position with SPY
Assuming it's Nov 15th, and the SPY is trading at 217.2. Suppose I sell 11 contracts with Dec. 21 maturity. How many shares of SPY do I buy to hedge my VIX futures position?
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Hedging jump models with a infinite number of derivatives
First of all, I inform you that I am not a financial mathematician and have vague knowledge about an incomplete market.
Stochastic volatility models are incomplete so derivatives cannot be ...
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153 views
Discrete time option gamma hedging
1) An option $V$ under the Black-Scholes model is perfectly hedged when it is delta hedged continuously with the underlying $S$. When the hedging time is discrete, the delta $\Delta$ needs to take ...
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55 views
Hedge ratio with non-whole betas
Pardon me if this is a simple question but it has been a while since I dealt with this. Last time was in my quantitative investment class.
Let's suppose I have a couple highly correlated instruments $...
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67 views
Cash deposit in replicating portfolio for BS equation unnecessary?
The book on Option Valuation Methods that I currently study (Higham 2013) constructs a replicating portfolio $\Pi = A(S,t)S + D(S,t)$ for deriving the BS PDE, where $D$ is a cash deposit. $D$ does not ...
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137 views
Delta neutral strategy using a combination of put and call options
I am learning about quantitative finance and currently learning about delta neutral strategies. The examples given are most of the times of the form: if you buy call options, you can hedge your ...
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1answer
74 views
Static hedge forward swap using zero coupon swaps
I'm trying to create a static hedge for a forward swap using two spot starting zero coupon swaps (to prove that there is no convexity adjustment needed). Here are the instruments -
Paying fixed in ...
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2answers
378 views
Hedging with machine learning
I’ve been thinking about an interesting problem lately: Suppose I have a position in an exotic derivative. How can I automate the hedging process?
Traditionally, one build a pricing model and ...
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3answers
92 views
heding bond risk with swap
How would a bond trader hedge his/her interest rate risk? A nature way is to hedge it with interest rate swap. Is this a choice in practice ? is their any risks associating with this hedging strategy. ...
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282 views
Hedging Ratios for Fixed Income Instruments
If you buy a corporate bond and you want to hedge the interest rate risk, how would you know how many interest rate futures/swaps to hedge the bond with?
The same with an MBS security, if you want to ...
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325 views
FX hedging: forward rate and implied forward rate
In this paper (box 1 page 24): https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Bulletins/2000/2000mar63-1brookeshargreaveslucaswhite.pdf
It is argued that the forward rate that a ...
