Questions tagged [hedging]

Financial strategy used to offset potential monetary losses or volatility.

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Spread Duration of a Fixed Rate Corporate Bond, with offsetting Futures Position

My question is relatively simple with respect to the below scenario: I take a $5m long position in a vanilla fixed-rate corporate bond with a spread of 1.50% for a YTM of 5%. These coupons are paid ...
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Difference between replicating portfolio and option price

Hello Quant Stack Exchange community, I've been working on a discrete-time model for option pricing, where I calculate the replicating portfolio using the model and compare it with the real option ...
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Hedge Effectiveness

I am trying to prove the hedge effectiveness of a SWAP, I know that a regression needs to be done between the hedged item (Loan) and the hedging instrument (SWAP), but I don't know which values should ...
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Measure of hedge efficacy or other means to compare hedging strategies?

Is there a measure of hedge efficacy or another means to compare hedging strategies? I have seen Institutional Investors take very different approaches to tail hedging. On one extreme, I have seen ...
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How an invesment bank make money with structured notes? [closed]

Possibly even autocallable notes. Suppose we are an invesment bank, and sell the zero-bond plus the call option to the market. Thus we set up a structured product. As far as I know, such products can ...
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Two types of hedge : impacts on position carry

Think of an IG bond purchase, financed at 3M Euribor, in an inverted curve environment. The yield on the bond, Y, is below the 3M Euribor, at purchase. The investor is looking to lock in a spread over ...
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Constructing a monthly option from quarterly options and monthly futures

Say we have quarterly options and monthly futures where the strike price is based on the average price of spot during the corresponding period. There are no monthly options. Can I effectively ...
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Long Bond & Interest Rate Futures Hedge - is it carry negative?

The situation is the following : A bank treasury book, finances its cash bond liquidity portfolio at Euribor 3m flat. The Euribor curve is deeply inverted. The bank invests in bonds with a positive ...
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About Hedging of One-touch Options

The pricing of American Digital Call (one-touch Calls) has the following formulas, taken from P13, the textbook \begin{aligned} C_{\mathrm{d}}^{\mathrm{Am}}(S, t ; E) & =\left(\frac{S}{E}\right)^{\...
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Are these two hedging strategies equivalent?

I am looking at two strategies for hedging interest rate risk, and I need some help to show whether they are equivalent or not. The aim of the hedging programme is to hegde the 10yr risk free rate in ...
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Can you hedge against a short squeeze with call options?

https://finance.zacks.com/high-short-interest-ratio-potential-sizable-short-squeeze-3371.html claims you can hedge against being squeezed out of your short position by buying call options with a ...
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Hedging gamma, theta or other risks

Speaking on a high level, in the Black-Scholes model the $f\left(T,S_{T}\right)$ payoff's value dynamic is given by $$df\left(t,S_{t}\right)=\left(\frac{\partial f}{\partial t}\left(t,S_{t}\right)+\...
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How do currency hedged ETFs work?

I am trying to understand how currency hedged ETF returns work with a simple example, namely, that where a Swiss investor can choose between buying a S&P-500 index fund which either a) hedges the ...
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Calculate minimum variance hedge ratio for foreign-denominated asset hedged to domestic currency

The formula for minimum variance hedge ratio (MVHR) is conceptually the correlation multiplied by the ratios of volatilities. correl (Y,X) * (STDEV Y / STDEV X) ...
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Portfolio Optimization with ETFs and Futures

I am looking to perform portfolio optimization with a single ETF (or two) and a VIX futures (with the possibility of adding an additional hedging instrument). Here are some features of my portfolio ...
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WN 30Yr UST Futures Conversion Factor vs Delivery Ratio

What is the logic behind using the conversion factor in determining the hedge ratio of deliverable bonds in 30Yr UST futures (WN contracts) throughout the trading life of the contract, but then having ...
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How were very large short volatility positions hedged?

This question came from an actual trade occurred in about 2014 when PIMCO sold very large positions in SPX 1840 put/1920 call strangle. It was reported the premium alone was worth \$100 million (they ...
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Should I resolve factor collinearity before hedging?

Goal: I want to run a portfolio, daily or weekly rebalanced, with a target idio vol %. Thus I will be market neutral, sector neutral and maintain some style exposure at 70-80% idio overall. Okay, this ...
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Hedging exotic options

How can exotic and other path dependent, such as asian options be hedged? For example in the case of an asian option, what is the replicating portfolio: what instruments to keep in it and “how much”? ...
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Hedge a down-and-in BTC put?

What’s the best way to hedge a down-and-in BTC put? I am not quite sure what the best practice here would be and would love to get some guidance. Thanks
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Hedging FX Risk of a fund

I manage a mutual fund where the underlying assets (or the shares i buys) are in USD, and my mutual fund is in CLP (Chilean Pesos). How can i hedge this fx risk without affecting the return of the ...
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Any other ways to hedge a bond portfolio against interest rate risk? [closed]

I'm currently taking a (gentle) intro to derivatives class. One of the exercises asked me to discuss duration as a risk measure and to provide alternative methods of hedging a bond portfolio against ...
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Delta Gamma Hedging Portfolio of Multiple Options Derivation

I am trying to make the correct derivation of the Delta Gamma Hedge of a portfolio composed of a multi-option strategy, like a Straddle with the following parameters Long 1 Call K = 100, Long 1 Put K =...
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Delta hedge call option on short rate

Usually delta hedging an european call option in the black-scholes model is constructed of three assets; a call option, the underlying stock and the risk-free asset often assumed to have constant ...
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Backtesting One-Factor HJM model with selling European Receiver Swaption

I am attempting back test the performance of a model - namely the Musiela equation used to model instantaneous forward rates with constant time to maturity: $$r(t,x)=r(0,x)+\int_0^t\left(\frac{\...
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equities hedging betas for a cross-sectional risk model

This question is on equities risk models. I would like to know how to define betas when using a cross-sectional regression approach, rather than the time series approach. My goal is beta hedging of a ...
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In a CRR model, find the Initial investment of the hedging strategy

Given a Cox-Ross-Rubinstein model with $T=10$, $u=1.1$, $d=0.9$, $r=0.02$, $S_0=100$ and a European call option with Strike $K=220$, find the initial investment of the hedging strategy. I know how to ...
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Relationship between options open interest and spot price movement

The hypothesis that I am mulling over (and more so, its effect on stock price movement) is the following. Hypothesis: Buyers of options do not hedge (as they don't need to) while sellers usually hedge ...
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Where can I learn more about market-making strategies? [duplicate]

I have some experience trading both sides of an order book, but not simultaneously in the same security (and certainly not at the size large market makers do.) I've searched pretty extensively for ...
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What is your exposure when you sell a binary option

I recently made a post that was closed right away because it wasn't focused and asked too many questions. In that post, I asked five questions that were related but different. It looks like stack ...
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Where am I going wrong with the calculation of conitnuous PnL from delta hedging?

I am trying to work out the PnL of continuous delta hedging. I saw This link to an answer here, however, I obtained a different answer without resorting to Black Scholes, which I will outline below. ...
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Dynamic Hedging

I am reading page 126 (Chapter 8) of the book "Option Volatility and Pricing 2E" by Sheldon Natenberg and have two questions I seem to be stumped on. (The bulleted text below the charts in ...
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Should one use the 30y bond alongside shorter tenors to hedge a MBS book?

Say I build a US treasury curve or swap by bootstrapping 2/3/5/7/10/20/30y on the run bonds. Say I have a prepayment model and an OAS model and I can generate key rate dv01s for the book as dBookNPV / ...
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Why reduce number of short contracts to reduce beta, and take long positions to increase it?

My question is about chapter 3 in the ninth edition of "Options, futures and other derivatives" by John C. Hull, subchapter 5 under the heading "Changing the Beta of a Portfolio". ...
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Unhedged factor models in trading

Suppose I have a factor model that takes in unemployment and GDP as $X_1, X_2$ respectively in estimating the fair price of asset $Y$. Say I observe that the market price of $Y$ has deviated ...
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Conditions for market completeness

We know that a market is called complete if it is possible to replicate any future payoff trading in its securities. Is there an exhaustive list of requirements that when satisfied imply market ...
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Updated Methods for deriving the "front month equivalent" series in commodities derivatives

It is common in commodities markets to hold many positions, both long and short, across a range of contract months beginning in the prompt month to five or more years out. [My question is:] What is ...
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Exact delta-hedging for endogenous payoffs

I would like to derive the exact delta-hedging strategy in the Black-Scholes market to replicate the following non-standard endogenous payoff. The particularity is that the payoff does not only depend ...
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How do banks and dealers effectively hedge a variance swap?

It is known that a variance swap can be replicated by a strip of options. However, it is costly to trade that many OTM options and there is not enough liquidity to trade the wings in the quantity that ...
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Portfolio optimization on a subset of assets

My objective is a portfolio optimization of the type: given $N$ assets with expected returns $r_i$ and a fixed portfolio size $M$, with $M < N$, find weights $w_i$ (positive or negative) maximizing ...
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Options skew: when is a perfect fit desirable?

I'm still troubled by a rather basic question, namely when is a perfect fit to the vanilla skew really necessary? I think if you are trading vanilla options and/or Europeans that can in theory be ...
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ETF Market Making Hedging

Suppose I am a market maker making a market on an S&P ETF. Suppose that I have calculated a fair ETF price of $395. My market therefore is 394.90 (bid) and 395.1 (ask). After my bid is posted I ...
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If you continuously delta hedge a long option position will you be flat at expiry regardless of realized vol? [closed]

Learning about gamma and am confused about practical gamma trading strategies and struggling to understand how they can be monetized. Is all gamma just about setting limit orders above and below and ...
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Pricing and hedging caps and floors on illiquid emerging markets

I'm tasked with the problem of setting up a cap/floor trading on an emerging market which doesn't have any interest rate derivatives traded yet besides plain vanilla interest rate swaps. We intend to ...
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How do sell-side institutions manage interest rate derivatives books in practice?

I'm interested in real practices of hedging interest rate caps and floors. There are plenty of articles explaining pricing of interest rate derivatives, but not so many explaining hedging such ...
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FVA demonstration? [duplicate]

In the well-known article by Mr. Piterbarg "Funding Beyond Discounting". he demonstrates that the price of a derivative product in a multi-curve universe: Who also expresses it but without ...
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How do you explain consistently making money with discrete hedging a call option?

In a backtest I did, I'm selling a call option and buying a delta amount of the underlying (calculated using implied vol). Now I know in the limit case of continuous hedging I end up paying a PnL ...
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Practically, are the prices of 0-strike European calls and stock identical?

By no-arbitrage, the price of a vanilla European call with $K=0$ should be that of the underlying stock (as selling the call is perfectly hedged by buying the stock). However, is this true in practice?...
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Gamma smoothing of vanilla options

I want to ask a question about the answer provided here: https://quant.stackexchange.com/a/35211/61083. I'm wondering if there is mathematical proof as to why it is working. Meaning if I reprice a ...
oumayma Tabbaza's user avatar
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Cash balance sign in hedging portfolio

Consider a derivative which depends on $n$ assets with price vector $X=(S^1,\dots,S^n)$. The derivative value $V_t$ is given by the function $v(t,S)$, so that the hedge ratios for the hedging ...
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