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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Fixed income management problem
First of all, hope everyone is safe and sound.
I would like to describe the following scenario and my thinking
Welcome any comments on my thought process!!!
3 swaps outstanding
Pay fixed 100mln, ...
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Dupire Vomma and Stochastic volatility
Suppose that you are short an option on asset $X_t$ following a pure diffusion. Suppose you are hedging your position using (Dupire) Local volatility model. Suppose that the option is concave with ...
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Proxy for performance of hedged portfolio: dividing price of security by price of hedge
I have seen in various places the use of the proxy: $$ P_S / P_H $$ to quickly analyze performance of a portfolio with a single stock and a hedge.
I was wondering how sound is this proxy, and how and ...
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Is it possible to construct a hedge that matches value Delta Gamma and Vega?
Given a strike price, current price, risk free rate, dividend yield and volatility, I have been asked to calculate:
- a hedge which matches the value Delta and Gamma
- a hedge which matches the value ...
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1answer
67 views
Can a delta hedge be negative for all values at one time, and positive for all values at another time?
I have a problem that states there was a formula for the hedge $\delta(t, S_t)$ for a contingent claim whose value depends on only the stock value when $T=20$. In this hedge, $\delta(t, S_t)<0$ at $...
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134 views
Gamma-Vega Neutral Portfolio Not Possible with Only 3 Options
Let's say we have sold a call option, x, on a share and we have 2 other call options, y & z, with different strikes and maturities to try and achieve a portfolio that is both Gamma and Vega ...
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50 views
Why are equity futures so disconnected to the underlying index? Example
I am looking at ZWPH0 which is a future and the underlying index MSCI World.
According to Bloomberg the prices are as follow:
13 March 2020: MSCI World 451 / ZWPH0 5234
16 March 2020: MSCI World 410 /...
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+100
Replicating a put option when short selling the underlying is not allowed
Suppose we sell a put option with maturity $T$, strike $K$ and fee $P_t=v(t, S_t, T, K, ...)$. The replicating portfolio consists of holding $\alpha_t = \frac{\partial{P}}{\partial{S}}=:\Delta_t$ ...
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1answer
50 views
Hedging Interest rate swaps in practice
Suppose we have a portfolio of i terest rate swaps that we wish to delta hedge. we build a delta ladder by shocking the instruments used to build the forecasting and discouting curves (Eurodollar ...
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1answer
56 views
Alternative strategies for hedging customer FX positions in spot market
Generally, if an FX broker decides to hedge a customers' position, it automatically hedges the customer's trade to Liquidity Providers when the trade occurs in the spot market. Let's say, the customer ...
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1answer
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What is the cheaper IR hedge: Futures or IRS?
Let's take the following idea:
Your objective is to hedge interest rate risk. You decide between Futures and IRS:
You can sell bund futures (10Y bond equivalent):
Price 177.70
Theoretical coupon: 6%...
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Intuition behind the Carr and Wu (2014) static hedging for ordinary options
Let $(S_t)_{t \geq 0}$ be the price of an underlying asset, $r$ be the risk-free rate of return, $q$ the dividend yield, $C_t(K,T)$ is the price of a call option written on $S_t$ at time $t$ with ...
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1answer
242 views
How to gamma hedge and vega hedge an autocallable product?
I am pretty new in quantitative finance, and I am interested by the hedging of autocalls.
Could you, please explain which financial products should be traded (specify the way, please) to delta hedge, ...
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Cash account growth in Burgard & Kjaer (2011)
I am rereading [1] and there is something I cannot get my head around this time.
In Section 3, page 6 of the paper, they derive the growth of the cash account when the hedging portfolio includes the ...
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2answers
50 views
Why aren't ETNs always listed with an inverse ETN?
Exchange Traded Notes (ETNs) are often issued to give buyers exposure to an index that cannot be easily constructed from liquid securities. (If an index can be constructed from liquid securities it ...
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Hedging with a different underlying - bond options case
I'm working on government-bond options pricing (Black-Scholes world, nothing fancy). In EUR, that's pretty much a "non market" in the sense that there's pretty much no quotes, so no implied vols, no ...
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1answer
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Delta heding & PnL
Sorry if it's a duplicate but i didn't find an answer to my simple question in the other posts.
Let say we short a call option on a stock.
$K = 100$, $C = 1$, $S = 100$ and $\Delta = 0.5$. No ...
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3answers
174 views
Why is the hedging cost using forwards $\frac{F-S}{S}$ and how is this related to Carry?
I'm a bit confused about hedging a foreign exposure and how this is related to carry.
I've read that the hedging cost $h$ is
$$h=\frac{F-S}{S}$$
where $F$ is the forward and $S$ is the spot price. ...
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How do FX brokers decide to hedge or book a customer's trades?
FX brokers try to be more profitable by,
- booking(b-book) the traders that are predicted to be losing money according to the trader profile or trading history. so, if the customer loses money, the ...
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78 views
Hedging with implied volatility
I am reading this article by R. Ahmad and P. Wilmott:
Which Free Lunch Would You Like Today, Sir?: Delta Hedging, Volatility
Arbitrage and Optimal Portfolios
Let $V^{i}$ the market value of an ...
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34 views
Hedging Strategy for European Call Option (Single period Binomial Model)
I am hoping to gain some insight to an exercise from my undergraduate Mathematics of Finance class. (This is my first course ever in finance, so bear with me.)
The exercise is:
Consider a single ...
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2answers
219 views
What are Market Makers hedging?
I know that the target of the market makers is to provide liquidity to the markets.
Right now I'm working as a developer in a quite large project of F.I. I know that they are providing liquidity for ...
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1answer
52 views
Deriving investment amount for one asset of a two asset minimum-variance portfolio
Suppose I bought $100 worth of stock A and I want to hedge it by shorting stock B, they have correlation of rho and respective standard deviations. How do I know how much of Stock B to sell? that's ...
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1answer
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EBA Stress Test Arbitrage
The EBA stress test defines specific shocks to yield curves that are applied to positions as at year end. There is no account for cashflows - it is simply an immediate shock.
Suppose the interest ...
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49 views
How to hedge payments in a foreign currency?
I´m confronted with solving the following exercise:
"Suppose that now is 1 March. You are a UK based exporter who´ll export products to a U.S. company for 250,000 US dollars and to a French company ...
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135 views
Hedging the duration and convexity of a bond portfolio
I'm trying to work through this homework question, but not sure how to approach it.
You recently took over as the manager of a bond portfolio. Your total assets under management – all consisting of ...
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1answer
112 views
Hedging a trade for PCA component neutrality
Suppose I am given a set of financial instruments, e.g. {1Y, 2Y, ..., 30Y} interest rate swaps or {Barclays, Lloyds, .. } FTSE100 companies. It doesn't matter which so let's go with IRS.
I have ...
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44 views
Hedging option delta
Let's say I am long 1000 50 delta call options. I need to hedge my deltas now. There can be infinite ways to do this. How should I think about proceeding wit this? My first thought was, if the ...
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0answers
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Why does the price of a butterfly spread increase are rate exponential [closed]
I know that stock prices are assumed to be Stochastic processes that follow Geometric brownian motion. The expectation of stock prices at time T given stock price at time 0 is: $e^{-rT}S_0$. However, ...
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0answers
141 views
Replicating portfolio with stock, bond and call option
I am trying to interpret:
I am having trouble interpreting the replicating strategy:
Context:
$\phi$ is a generic payoff function, 0 < S < $\infty$, assumed throughout to be twice ...
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Hedging a long position-one period from Steven Shreve Stochastic Calculus for Finance
The following question is taken from Steven Shreve Volume 1, Chapter 1, Exercise $1.6$ (Hedging a long position-one period)
Consider a one period binomial stock model with $S_0=4$, $S_1(H)=8$ and $...
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Spread option static replication
I have a methodology for hedging a spread option but not sure if it makes any sense, or if I can do any better. Happy to hear your advice!
Suppose you have a spread option paying off $P_T(r_T,s_T)=(...
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1answer
82 views
Which currency to hedge a position in FX options?
Let's assume a bank sells to a client a put of \$1,000,000 dollars on USDJPY at 110 in 6 months. The delta of this put is -0.6, spot is 112.
So to hedge its position the bank has to short \$600,000 ...
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1answer
96 views
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
49 views
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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1answer
49 views
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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2answers
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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
50 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
116 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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1answer
425 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
87 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
150 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
58 views
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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108 views
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 ...
