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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Why are implied parameters preferred over expectations of future implied parameters?

For example, when we price options on assets under the Heston model, we often compute the volatility of the volatility of the price of those assets implied by the market at time $t=0$ using the market ...
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149 views

Trade anything?

I have a question after reading the post below. https://www.onlinebetting.org.uk/betting-guides/can-you-bet-on-anything-you-want.html Question: I want to bet on a niche topic or asset or anything that ...
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General question regarding delta heding

I was wondering if I have to take the strike prices of options into consideration when doing a gamma and delta hedging. As an example, let's suppose that I have 2 positions: a long position call ...
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How to find percentage of FX exposure hedged through financial statements

I am analyzing a company's annual report, and wish to find the percentage of FX exposure they have already hedged. I have the following information: The net FX exposure for 4 different years The ...
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47 views

Barrier shift consideration in delta hedging down and in puts (PDI)?

I have a question regarding the barrier shift used when risk managing a down and in put (PDI). I'm reading Exotic Options Trading by Frans de Weert and he gave this example. Trader is long one PDI 100/...
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Should you hedge theta?

Consider an arbitraty interest rate derivative $C$. Assume that in order to hedge it, you are allowed to construct portfolio $H$ of linear combination of simple instruments such as Interest Rate Swaps ...
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What are the most common ways that quantitative funds construct industry/style-neutral factor portfolios?

For instance, consider momentum strategies. Naive portfolio construction will likely load on large style/industry return components, which increases portfolio risk dramatically. How do quant funds ...
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324 views

What is the point of hedging in this scenario?

I'm new to this stuff, and have the following question: In John C. Hulls book the following scenario is presented: on May 15 we enter into a contract to sell 1 mill barrels of oil for the market price ...
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Mark Joshi's book - quant interview questions

I am currently doing the question on pricing the option with payoff: $$\max (S(S-K),0).$$ On the relevant question section, it's asked why would a bank be reluctant to sell such option? I can't really ...
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Implementing a hedging strategy for oil future options

I am currently writing a paper examining two models for pricing options on WTI Crude oil futures, and I want to backtest hedging strategies from both model and compare them against each other. However,...
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Empircal data analysis delta hedge error of Black-Scholes by Mark Davis

Regarding Mark Davis derivation of the delta-hedging error occuring in the black-scholes as a result of difference in realized volatility and implied volatily. The formula reads as follows: $$ Z_t = \...
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A decent model to calculate hedges

Is there an option pricing model that wouldn't be too time consuming to set up in Python (for example) and that would provide better delta hedges than Black-Scholes? This would be mainly for equity ...
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delta hedge asset exchange option with futures on spreads

say I have an option that exchange A with B. If I can only hedge it using futures on the spreads between them, how would I do it?
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138 views

FX Hedging costs when using 3m FX Fowards vs XCCY swaps for an IG Bond

Suppose I want to hedge the FX exposure of an USD Corp Bond(held to maturity) to GBP and I can choose between rolling 3m FX Forwards and XCCY swaps. How can I estimate the difference in the hedging ...
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Are there any studies on the link between energy markets and hedging-strategies for Cryptocurrency mining?

Full Disclaimer: I first asked this question on Bitcoin.SE, however I feel like my question is more relevant to this site as there would be wider knowledge and insight of some better sources or ...
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128 views

Delta hedge error black-scholes by Mark Davis

I'm currently reading a paper by Mark Davis in which he talks about a delta hedging error in the Black-Scholes formula. The delta hedging error is given expressed as $Z_t$ with the formula: $$Z_t = \...
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Extracting the OAS out of an MBS?

I was reading about OAS and I'm wonder how one could "extract" (or "capture") the OAS out of a product by hedging out all the other risks. One of the explanations I got from OAS ...
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132 views

Hedging with FX swaps

I am trying to get the mechanic of the swap rollover. Funds usually hedge FX risk of their long term foreign assets (eg UST) with short term FX swaps (usually maturity < 1yr), by rolling over fx ...
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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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118 views

Correlation for Trading vs. Risk Management

Assume a portfolio that contains some asset A and that I am contemplating hedging my delta in A by taking a position in asset B. I would determine how much of B to buy/sell based on the linear ...
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MSCI World and MSCI World future: low correlation, how come?

Noticed today that hedging the MSCI World (NTR, div reinvested) by shorting it's very own future (same underlying index, also NTR) leaves a lot of active risk. This is explained by low correlation ...
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58 views

Equities Market Making Hedging, and Hedging Against the Effects of Hedging?

I was hoping someone could enlighten me as to how equity option market makers hedge in general, and whether they account for the effects of their purchases on the underlying share price when hedging ...
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Arbitrage portfolio example

Can you give me a concrete example of a self financing portfolio which gives arbitrage opportunity in the two-dimensional Black-Scholes model? By the two-dimensional Black-Scholes model I mean $$dS_{1}...
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Who hedges (more): options seller or options buyer?

When the open interest increases, this means that there is a buyer and a seller of that option. Both seller and buyer are behooved to hedge their positions, with the opposite sign; but I doubt that ...
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Best way to lock in margin rate via hedging

I'm currently paying a 1.25% margin rate. This rate is based on the Fed Funds rate plus a margin. I would like to hedge against the possibility of this margin rate increasing. What is the best/...
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How does a hedged portfolio account for other greeks?

So a classic delta-hedged portfolio on a call option is: $$-C - \Phi(d) \cdot B + \frac{d}{dS}C \cdot S = 0$$ How is risk of other Greeks hedged? Is it something like this? $$-C - \Phi(d') \cdot B + \...
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Non convertible currencies and trade

How importers and exporters sell/buys products if their country currency is non convertible or when non residents want to invest in the country? For example in Brazil.
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Non attainable claim - Incomplete market

I am wondering whether there is a standard procedure to find a non attainable (i.e. non replicable) asset in an incomplete market. As an example, let us have the following market ($B = (B^1, B^2, B^3)$...
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Which exact interest rate should I use for valuing equity index futures (ie. SPX, MXEA)?

I'm trying to build a model that values futures for equity indicies like SPX. For example, this product link here. I know that the model is simple (please correct me if I'm wrong): $$ S_{T} =S_{0}e^{(...
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ETF Market Making - Locking profits via hedging

I am interested in deeply understanding the way ETF market makers operate to profit. I already know that market makers profit from buying at the bid price and selling at the ask price, and I am also ...
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102 views

Calculating vega in Heston?

I often see Vega in the Heston model specified as: \begin{align*} \nu & = \frac{\partial C}{\partial v} = \frac{\partial C}{\partial v_0} 2 \sqrt{v_0} \end{align*} where $v = \sqrt{...
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Hedging strategy for payoff $\int_0^T\log S_u\mathrm{d}u$

What would a hedging strategy look like for a payoff $\int_0^T\log S_u\mathrm{d}u$? I have determined under Black-Scholes stock dynamics, $$\int_0^T\log S_u\mathrm{d}u=\int_0^t\log S_u\mathrm{d}u+\...
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147 views

Delta hedging for an American call option on a stock with a continuous dividend yield

Let the dividend yield be $\delta$ and $C_u, C_d$ and $S_u, S_d$ be the up and down values for the stock and the call respectively over the period $\Delta t$. In Hull and all other resources I've ...
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Crack spread hedging and increment risk

What are increment risk of crack spread hedging(buy crude oil and sell oil products on futures). And can those risks be reduced? Any advices.
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Running a Hedge PnL Stress Test - how to?

I have a long only global equity portfolio hedged a by shorting an equity future. Say my portfolio is long USD100m equities and therefore I short USD100m of MSCI World future (assumed Beta of ...
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Static vs Dynamic Hedging: when is each one used?

I understand that, in Static Hedging, you don't have to keep rebalancing the offsetting position(s) while in Dynamic Hedging you have to constantly keep re-adjusting it. What I'm not clear on is when ...
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355 views

Vega in the Heston model

I'm trying to calculate the hedging quantities of the Heston model. I undestand that the replicating portfolio consist of one option, $V = V(S,v,t)$, $\Delta$ stocks and $\phi$ units of the option to ...
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57 views

Determining Presence of Arbitrage

I am slightly confused by part (b) of this question. My understanding is that the easiest way to determine if there is arbitrage is to compute the state prices and then look at their sign: if one or ...
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156 views

Delta neutrality (derivation)

I'm confused about the math for the delta-neutral portfolio. Assume we have a short position in a European call option with price $p(t,S_t)$ and want to hedge it with the stock with price $S_t$. The ...
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84 views

Replication of European swaption

Suppose we have a European payer swaption with 5-year maturity and 10-year tenor. The underlying is clearly the 10-year tenor payer swap. Does it mean that to replicate the swaption I need to ...
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445 views

Hedging in the Heston Model

I have simulated an underlying stock price, $S_t$ and a stochastic variance process, $v_t$ with the following stochastic differential equations from the Heston Universe: $$ dS_t = \mu S_tdt + \sqrt{...
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Nonlinear liabilities for pension funds

I'm reading about hedging for pension funds, I understand why we hedge the liabilities but what I don't understand is the concept of nonlinear liabilities ? what do we mean by that ? can someone ...
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How often to tune the regularisation parameter in LASSO?

I'm trying to implement the following paper: Avellaneda & Lee (2010), Statistical Arbitrage in the US equities market. To build the strategy, the idea is to trade a stock and hedge using a basket ...
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To hedge, why not simply buy puts that expire on the same date as your calls?

This r/options comment avouches that on Sept 24 2020 Someone bought 40,000 [T]esla puts. The strike price is 40 dollars so the puts will only pay out if Tesla is below \$40. The expiration date is ...
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Strategic Asset Allocation and Multi-Asset Class Option Based Tail Risk Hedging

If a Strategic Asset Allocation is defined as an asset allocation to weather all investment environments and one which should be employed in the absence of any market views, it would appear that the ...
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Do option values depend on whether a trader hedges with a long stock or short stock position?

Sheldon Natenburg in his book Option Volatility and Pricing in the chapter on Risk Management is trying to explain the effect of interest rates on options. He says The value of a stock option will ...
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162 views

How to get exposure to realised volatility while being vega neutral?

Let's say I am predicting the realised volatility of a stock index. I am buying or selling straddles based on whether the predicted vol is higher or lower than the implied ATM volatility for the ...
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75 views

Hedging predicted volatility

Q. If you predict the volatility of the stock is 10% a year from now and current price is X dollar, how do you hedge the risk? Im not sure why I am finding this so hard. How do we use options (...
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178 views

Reason to hedge a European call option

Assume I write a call option on one share of the stock that I have. After selling the option I have an obligation to sell one share of the stock at some future time. I already have the stock, why ...
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How do I hedge two/three zero coupon bonds with different maturity under Vasicek short rate model?

I am working on the case that I need to hedge two bonds with different maturites under Vasicek model, which is \begin{equation} dr_t=a(b-r_t)dt+\sigma dW^Q_t \end{equation} and I know how to price the ...

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