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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Delta hedging: theoretical value vs actual price
One way to derive the Black-Scholes PDE is via the Delta-hedging argument:
Suppose that $V_t = V(t, S_t)$, for some function $V: [0,T] \times \mathbb{R} \to \mathbb{R}$. We construct a portfolio by ...
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FX TARF hedging (target redemption forward)
Lets say client is buying from you
eurusd tarf
strike 1,16
sell eur buy usd
notional per fixing 500k usd
leverage 2
first expiry 1 month from now, 12 fixings in total (monthly)
full final payout
...
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0answers
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what is the state of the art method for hedging barrier options?
I want to create my own Barrier options for some security, I want to trade. I did some literature review, and found a static replication method, and many dynamic replication methods. I want to know ...
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HEDGING WITH A PUT OPTION
In the following example, for 3rd question and 4th question why do we have to add (Stock price in three months - Current stock price) to put option profit?
Thank you in advance.
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How to adjust delta hedging if stock price decreases?
Question: You are long a call option no MITCO stock. You have delta hedged your position. You hear on the radio that the CEO of MITCO has just been arrested for running a massive Ponzi scheme. The ...
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1answer
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Do not understand 'The gain (loss) on the stock position would then tend to offset the loss (gain) on the option position' [closed]
Currently, I am reading John Hull's Options, Futures and Other Derivatives. On page 401, the author mentions the following:
Suppose that the delta of a call option on a stock is $0.6$, stock price ...
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0answers
44 views
Simple 3 way delta hedge
Consider 3 futures contracts:
A BTC/ETH, settled in BTC
B USD/ETH, settled in ETH
C USD/BTC, settled in BTC
As the markets aren't efficient, sometimes these ...
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2answers
111 views
Using cumulative returns to hedge against the overall trend
I am curious about a hypothetical strategy where you are long for a given period (like a year), and at the same time you hedge against the overall trend by going short everyday and accumulating the ...
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Optimal Hedging of Options - asymmetry between long and short vol positions
Going over Zakamouline's Approximation method for optimal delta hedging of options, it is claimed that the result remains valid for both buying options (long vol positions) or selling options (short ...
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How to price, hedge ESG-dependent products?
I read with interest news about Netherlands bank trading several novel products in which a counterparty pays floating cash flows linked to the counterparty's ESG (environment, social, governance) ...
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Hedging Strategies involving Forwards and Options [closed]
"An investor or business with long exposure to an asset can hedge exposure by either entering into a short futures contract or by buying a put option. An investor or business with a short exposure to ...
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102 views
Classic dynamic delta-gamma hedging in Python
I am trying to run a delta-gamma hedge for a Black-Scholes model in Python.The Euler disceretizatioin of the paths is the simplest possible. I wrote the code below but the PnL looks undesirable and ...
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1answer
67 views
Hedging convexity for long-dated fixed cashflows
I'm wondering what are the different ways of hedging the convexity in fixed long-dated cashflows (maturity > last liquid point). Also, if you'd say receiver swaptions would be the way to go, could you ...
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1answer
129 views
evaluation of option pricing models based on Greeks empirical hedging effectiveness
I’ve studied many different pricing models (B&S, Vasicek, CIR, Merton jump, Heston, ecc), each of them gives as output a different price and different values for the Greeks.
So, for example, if ...
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To calculate the Hedge Efficiency and Optimal Hedge Ratio with BEKK in R
I estimated an MGARCH-BEKK model (using the R package BEKK, i.e. Baba, Engle, Kraft and Kroner; see Engle and Kroner (1995)) on time series of spot and futures ...
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1answer
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Why is the CAPM Beta defined this way - Beta hedging
Let's say I have two equity indices X and Y. Assume they are negatively correlated with some leverage. I want to hedge X with Y.
I have seen many ways of computing a beta to describes the ...
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2answers
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How do I derive a blend of a 3Y future and 10Y future risk?
So I have a portfolio of Govt. bonds that I'm trying to hedge with futures. Let's take one of the bonds out of the portfolio as an example.
In bloomberg, every bond and its future counterparts has a ...
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1answer
64 views
stochastic interest rate in binomial pricing model and in continuous models
Is the interest rate allowed to be truly stochastic in the binomial pricing model and in continuous models so that we are still able to switch to the risk-neutral measure?
Shreve mentions multiple ...
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2answers
209 views
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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1answer
80 views
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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1answer
79 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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1answer
54 views
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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0answers
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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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2answers
181 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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1answer
100 views
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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0answers
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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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0answers
48 views
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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1answer
100 views
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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2answers
203 views
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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1answer
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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
89 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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1answer
419 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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2answers
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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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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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223 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?
MY
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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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1answer
155 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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1answer
136 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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0answers
59 views
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
202 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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1answer
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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
295 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
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Greeks and options hedging
Why is it that theta is sometimes taken as the proxy for gamma of the underlying asset in options hedging?
