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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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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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70 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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73 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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112 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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42 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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61 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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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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34 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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209 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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71 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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122 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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191 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 ...
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34 views

Going from Stochastic Discount Factor / Risk Neutral Density -> Hedge Ratio

Assuming a probability distribution function is known in its entirety, what methods are available to construct a hedge ratio? For guidance, I went to the canonical Empirical Pricing Kernels and found ...
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158 views

Heging against stochastic interest rate

I am working on an Index and I am trying to price Call options on it. I work with the 3 Months LIBOR as Cash. I use the following Black-Scholes formula $$C_{t} = S_{t}e^{-q_{t}(T-t)}\mbox{N}[d_{1}(t)]...
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How to verify if beta “works” for hedging?

Suppose you want to calculate the beta of a stock to an index using weekly returns. If the stock is sufficiently volatile, and you use few enough observations, it is possible that the absolute value ...
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49 views

duration hedging of illiquid bonds

Let's say that I have a totally illiquid 30Y bond that I want to hedge with short-dated bonds and that the market is liquid up to 10Y bonds. After 20 years, my 30Y bond will become a 10Y bond so I'll ...
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136 views

Taylor series expansion and hedging

I'm reading Options, Futures and other derivatives of Hull, ed.8. In the appendix to chapter 18, author uses Taylor series expansion to find the relationship between portfolio's price change and ...
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286 views

Hedging with variance swaps: how to calculate the notional

Returns on an asset are negatively correlated with own variance, and I would like to set up a hedge with a variance swap (no options are traded). I need to decide on the notional of the swap: any ...
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61 views

Pricing and hedging OTC vanilla options

Most OTC option textbooks are about exotic options. I'm curious how sell-side price and hedge OTC vanilla options e.g. European option. What models do they use? How to forecast volatility (using GARCH?...
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Volatility swap hedge

What are the hedging methods for volatility swap (rather than variance swap)? What are the possibilities of setting up a static, semi-static or dynamic hedging? I am aware of but have not yet read ...
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How to delta-one hedge a IRD sensitivity on an intra-day basis (using eg, FX or bond futures)?

I'm looking to hedge an interest rate differential sensitivity (the output from a statistical model of spot FX rates) on an intraday frequency. What is the best way to do it? Important factors ...
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Research topic on volatility

Currently studying about volatility, VIX and implied volatility as well as option pricing via stochastic volatility models. My question is how these are used in real life except of speculation. Do ...
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79 views

Mathematical definition of a hedge?

For two given portfolios/trading strategies I want to know what criteria need to fulfilled in order to call the one portfolio a hedge to the other. In other words; what is the mathematical definition ...
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545 views

Using a call-spread to hedge a digital option

I have a digital option that pays out \$1M at time $T$ if the price of the underlying stock is higher than \$1300 (with current price ~\$1000) and, obviously, zero otherwise. I am in the Black-Scholes ...
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Why does it not make sense to hedge a long position in an option already in the portfolio?

The meaning of hedging I make sense of is to insure and remove all risk associated to an option. However, in the question below because the portfolio already has the option, the goal is to replicate ...
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Constructing a long futures hedge

I'm taking a financial engineering course through coursera and on a slide one of the lecturers talks about how a long hedge is used in the futures market. Here is the text: Today is Sept 1st. A ...
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106 views

Using PCA to identify proxies for highly illiquid assets?

Was wondering if anyone had any literature to share on the use of PCA to identify proxies for highly illiquid assets? Say for example I have sold an option on stock A, an index constituent, and would ...
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Pricing and hedging of vanilla options based on non-tradable underlying

Consider a non-tradable stock index $S$ which satisfies: $dS_t=\mu S_tdt+\sigma S_tdW_t$ and a risk-free asset $B$. I want to price an European Call option with the payoff $C_T=max(S_T-K,0)$. The ...
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306 views

Can I replicate put option by trading futures?

Very basic question. Imagine I have some BTC (which is a bubble but I can't get rid of), and some money on an account which allows me to hedge with CME BTC futures. The problem is that if bitcoin ...
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455 views

How did the SVXY ETF (-1x VIX) survive a 115% jump in VIX?

The SVXY ETF is a "-1x" short exposure to the VIX, rebalanced daily. Very importantly, it is an ETF, and not an ETN. As an ETF, its holdings are fully transparent and posted on the fund sponsor's ...
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Instruments cointegration: how to handle negative slopes

I'm making research on the simple cointegration trading strategies - simply trading on reverting spreads to mean. Approach. I'm finding two instruments with high correlation (let's call them X and Y)...
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How do energy companies measure the magnitude of the risks of buying energy at a variable price and selling it at a fixed price?

Power and gas retailers are exposed to a variety of risks when selling to domestic customers. Many of these risks arise from the fact that customers are offered a fixed price, while the retailer must ...
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Minimum Lower Partial Moment (n=2) hedging ratio

I would like to better have understanding on the minimum-LPM hedging. I have understood that the co-LPM matrix cannot be modeled by GARCH type models that are used to estimate to the covariance matrix,...
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90 views

EuroStoxx50: long index and short futures

If you look at a cumulative return of a very simple portfolio, consisting of long EuroStoxx50 total return index and short EuroStoxx50 futures, you can see that over the last 10 years this portfolio ...
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376 views

Literature on FX market-maker hedging strategies

Specifically, FX market making. I am not exactly looking for market-making strategies, but rather when once a market-maker has assumed a net position in a currency spot trading market, what are some ...
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What is the optimum hedge ratio when trying to hedge one underlying security with another which is similar in natural?

The question is specified as hedging exposure to oil prices using forward contracts on oil) My idea is that we can just purchase one forward contract for each asset,then it should be perfectly hedged, ...
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178 views

Can we rewrite the pnl of a continuous hedge option as the time average of the volatility weighted by the square gamma?

From what I understand of El Karoui BS Robustness Formula, we can write the PnL of a continuously hedged option as the time average of the volatility weighted by the square gamma, is that right? $$PnL ...
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47 views

What does “follow forwards” mean?

In the context of "if equity returns follow forward", what exactly does "follow forwards" mean? Thank you!
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197 views

Hedging error in a stochastic volatility model

I would like to find how much error I make when I hedge a call option using Black Scholes model in a market which is actually governed by a stochastic volatility process such as $$dS_t = rS_tdt + \...
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How to tail a hedge? (Question 3.26 from Hull, edition 10)

I am new to finance so I apologize if my question is really basic (which it probably is). If this is not the right "stackexchange" group for this, kindly refer me to the right one. Let's say you own ...
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What really is Gamma scalping?

How does Gamma scalping really work? It seems there is no true profit scalped. If we look at the simplest scenario, Black-Scholes option price $V(t,S)$ at time $t$ and the underlying stock price at $S$...
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1answer
126 views

Floating Strike Lookback Delta Risk

I'm running through some delta hedging simulations of floating strike lookback call options (that is, I'm short the options) during a volatile (downside) period for the underlying and some very odd ...
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2answers
2k views

How to calculate FX hedged bond yield?

How does one go about calculating a 10 year US treasury yield hedged back to EUR? I vaguely understand this but I think there's two methods 1) Calculate 3-month annualized hedging cost 2) Calculate ...
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242 views

How to calculate a future contracts price?

I have the following question from Hull, problem 6.17: On August 1 a portfolio manager has a bond portfolio worth $10 million. The duration of the portfolio in October will be 7.1 years. The December ...
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540 views

How does one calculate the Libor future contract price?

I have the following question from Hull, problem 6.16: 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 ...
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If spot prices tends to be higher than futures prices, then long hedges are particularly attractive - Why?

Explain why If spot prices tends to be higher than futures prices, then long hedges are likely to be particularly attractive Supposed logic behind this is that if spot prices are likely to be ...
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Question about Delta Hedging

So in Delta Hedging, we know that the delta value gives us the hedge ratio between the option and the stock. For example, if we are long 10 shares of stock, and the delta value is 0.5, then we would ...