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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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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1answer
35 views
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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41 views
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?
$$-C - \Phi(d') \cdot B + \...
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1answer
25 views
Non convertible currencies and trade
How importers and exporters sell/buys products if their country currency is non convertible or when non residents want to invest in the country? For example in Brazil.
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0answers
67 views
Non attainable claim - Incomplete market
I am wondering whether there is a standard procedure to find a non attainable (i.e. non replicable) asset in an incomplete market.
As an example, let us have the following market ($B = (B^1, B^2, B^3)$...
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36 views
Which exact interest rate should I use for valuing equity index futures (ie. SPX, MXEA)?
I'm trying to build a model that values futures for equity indicies like SPX. For example, this product link here. I know that the model is simple (please correct me if I'm wrong):
$$
S_{T} =S_{0}e^{(...
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2answers
316 views
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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1answer
77 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{...
5
votes
1answer
113 views
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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vote
2answers
87 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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0answers
30 views
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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0answers
34 views
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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votes
1answer
510 views
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 ...
6
votes
1answer
210 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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0answers
55 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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votes
1answer
105 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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1answer
53 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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1answer
209 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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0answers
41 views
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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0answers
70 views
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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2answers
98 views
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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1answer
69 views
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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0answers
28 views
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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1answer
84 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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1answer
66 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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2answers
117 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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0answers
34 views
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 ...
0
votes
1answer
96 views
Managing/Hedging strangle with futures at strike prices
Since I am very new to options, I thought would be great to ask the opinions of the experts in this group. Please note that I will hold strangles till expiration.
The goal is to sell strangles (OTM ...
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2answers
192 views
Option seller: Why is delta hedging required if I am long/short the underlying with same number of lots as the OTM options I sold?
Situation: Sold OTM call while long the underlying. Stock did not tank, it went up too much breaching the breakeven point (strike price+premium).
If I sell 1 lot of call options and I am being long ...
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vote
0answers
36 views
Hedging or Relative Value Strategies with Rho or Tau Correlations?
I understand that the Pearson correlation indicates the strength of linear relationship between two data sets. The applicability of this to hedging strategies is intuitive: If I can establish a linear ...
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1answer
36 views
Can the spread between option premium for bull call spread change over time?
I have created a bull call spread. There was spread of 70 dollars between the option premium of 2 strikes I selected. Now the spread between option premium of 2 strikes is greater than 100 dollars. ...
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vote
1answer
83 views
Hedging an Inverse Product
We have two different products that follow the same price $S(t)$ for all time $t$. The payout for product one is given by $w_1(\frac{100}{S(t)} - \frac{100}{S(t + \Delta t)})$ and the payout for ...
5
votes
1answer
148 views
Hedging a FVA in practice
A FVA (forward volatility agreement) is a forward contract on the ATM implied volatility. So at at maturity date $T$ the payoff of a FVA with unit notional is
$$
(I_{ATM}(T,T') - K)
$$
where $I_{ATM}(...
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0answers
53 views
Hedge robustness of the one factor Hull White model
I recently came across a quote in a book:
"All single factor models share the limitation that shifts in curve levels cause shifts in the package of vanilla options that are a good hedge for the ...
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2answers
128 views
Repo sensitivity
Hope u're all doing well in this sanitary crisis.
I have a question concerning repo sensitivity of basket/index derivatives regarding market making for instance.
The argument to compute such a repo ...
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0answers
105 views
What put options would the Universa Tail Fund have bought?
According to this Bloomberg article, Universa was up 3,600% in March 2020, by hedging with extremely out-of-the-money puts: https://www.bloomberg.com/news/articles/2020-04-08/taleb-advised-universa-...
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1answer
210 views
Why do we not use copula for forward starting options?
Why do we use copulas for spread options but do not use them to correlate random variables across time, such as in the forward starting option?
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2answers
369 views
Confusion about replicating a call option
Assume standard Black-Scholes model,
$$dS(t)=S(t)(rdt+\sigma dW(t))$$
where $\sigma$ is a constant and $W(t)$ is a Brownian motion under the risk neutral measure.
A call option is replicable, so if we ...
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vote
1answer
118 views
VIX vs S&P: Drift in the hedging residual?
I am looking at the daily returns of the VIX index (dVIX ) and the daily returns of the S&P 500 (dS).
I am running a linear regression (using 0 intercept) and get a regression slope of -1.4, i.e.
...
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1answer
139 views
Question about using Ito's lemma in Gamma PnL
While deriving the delta hedge error if we hedge with implied vol, and the true vol is different, we say that the PnL of the call option is:
$$dC=C_tdt+C_SdS+0.5C_{ss}<QV>dt - (1)$$
Where $<...
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1answer
103 views
PnL due to model recalibration and its relationship with hedging error
Consider the case where at t=0, I calibrate my model to the market, but at t=1 my model is no longer able to recover the price in the market, so it needs recalibration. Say I have delta hedged my ...
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0answers
47 views
Interest rate hedging using treasury futures ā timing and duration
I'm pondering over the following (rather standard) problem:
We have \$10 million invested in government bonds and are concerned with highly volatile interest rate over the next six months. We want to ...
0
votes
1answer
103 views
Why do replicating strategies delta hedge?
We have a simple BS-market of one risky asset $S_{t}$, a bond $B_{t}$ and a digital option $X$ on the risky asset with value process $V(t,S_{t})$. I was able to derive $V(t,S_{t})$ using risk-neutral ...
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0answers
60 views
Garch models - are they useful for hedging? If so how?
I understand that Garch models are useful to predict volatility. But are they useful for hedging in practice? If I want to hedge volatility, why shouldn't I just use a Variance Swap?
In other words, ...
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votes
2answers
122 views
Should I hedge this spread with a spread option or an insurance product?
My firm generates electricity from wind. Accordingly, most of my generation takes place at night, when prices are low -- and, due to congestion / oversupply, often sharply negative -- so much so that ...
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votes
0answers
65 views
Finding a PDE for an option $V(t,r(t),S(t))$
I have 2 approaches in my mind for finding a pde of an option that depends both on the short rate as well as the stock price- $V(t,r(t),S(t)$. Are these equivalent?
Find a hedging portfolio by ...
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4answers
802 views
How do traders hedge against ātail side riskā in practice?
In a recent CNBC interview, Black Swan author Nassim Nicholas Taleb gave a categorical advice about investing in the Corona period. āIt is very unwise to do any form of investment without some form of ...
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2answers
153 views
How does a pricing model 'understand' the cost of hedging?
Suppose I am pricing a multi asset at the expiry payoff. Theoretically I define their joint distributions in the risk neutral measure, and price using expectation. However, how do I know that the ...
2
votes
1answer
154 views
What kind of entities use exotic derivatives, and do they serve any purpose other than hedging risk?
I work in a sell-side bank in derivatives modeling. My work involves modeling and pricing of exotic derivatives and I often wonder who are the buyers of these products.
From my research, I found that ...
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1answer
69 views
What are the differences between hedging with swaps, options or futures? [closed]
For instance if a bank wants to hedge against interest rate risk, it could use interest rate swaps, or options or futures contract. Or in any other example, when a manager is hedging against risks.
...
