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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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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How do traders hedge against “tail side risk” in practice?
In a recent CNBC interview, Black Swan author Nassim Nicholas Taleb gave a categorical advice about investing in the Corona period. “It is very unwise to do any form of investment without some form of ...
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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 ...
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1answer
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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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61 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.
...
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35 views
How do I calculate FX forward hedge ratio?
Suppose I have a USD holding of 1,000,000 in my portfolio and I want to convert it into EUR in a month's time.
I enter into a FX forward contract of the same amount USD 1,000,000, meaning that I have ...
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17 views
Why might a bulk annuity provider hedge their exposure to risks such as inflation, interest rates, and exchange rates on a weekly basis?
I was recently speaking to someone who works at a UK life insurer which offers defined benefit pension scheme buy-outs. He mentioned that the company employs traders (of bonds and swaps, mostly) and ...
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65 views
Why do (life) insurance companies face equity risk?
I am currently reading through a study published by the Institute and Faculty of Actuaries on hedging practices within the insurance industry.
Within the executive summary, under 'Key Risks', it is ...
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63 views
Vega hedging swaption with caplets - precisely, what will go wrong?
I am trying to form a kind of unified perspective of how (vega) hedging an exotic with vanillas, or hedging a 'basket option' with vanillas will go wrong. So in particular, I want to be able to ...
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Cross hedge: Which commodity to hedge when you have to hedge the jet fuel price but you have option between two commodities
If we have an option between two commodities to hedge jet fuel and the commodities have results as follows: minimum variance hedge ratio: 1.07 for commodity 1 and 2.53 for commodity 2
...
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63 views
Can a portfolio value consisting of longing a delta shares of stocks and shorting a call option greater than strike price?
While trying to implement Black-Scholes delta hedging for a European call option using Python, I came across the following phenomena:
Given a portfolio consisting of longing a delta shares of ...
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How can I theoretically hedge a bet, which is about whether or not price of a stock will get above a number?
For example, the bet may be about someone giving me P dollar and I will pay that person 300 dollars if tomorrow Tesla gets above 860 dollars.
While assuming the Black-Scholes model hold, I can simply ...
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1answer
127 views
Simple strategies for tail risk hedging that retail investors can use
Universa Investments run by Mark Spitznagel popularized the idea of portfolio insurance (also known as tail hedge) protecting the investor against severe market declines (tail risks). By using this ...
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Hedging Bond portfolio with Futures
I am working on a risk department. Our portfolio contains mostly some long German bond 15y and we tend to hedge it through BUXL and BOBL via PCA
but our 15y key rate duration is not properly covered.
...
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Tailing the Hedge for Minimum Variance Hedge Ratio (Hull, 10ed)
I am an amateur reading Hull's Options, Futures and other Derivatives.
I have encountered an issue similar to the one here:
How to tail a hedge? (Question 3.26 from Hull, edition 10).
The author ...
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31 views
Sign of DV01 for FRA and IR Swap and Their Relationship
I'm confused with the sign notion (positive or negative) of DV01 for FRA and IRS.
Say if I short FRA and also long IRS (pay fixed receive Float) with same underlying, does that mean both dv01 of these ...
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489 views
bank issuing structured products
"The investment banks supplying structured products were effectively buying options from investors"
How to understand this quote from this source?
I would think the investors are usually had (long) ...
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Hedging Covid-19 and other low probability high loss risks
Covid-19 and similar risks are low probability, high loss events. Does it make sense to utilize options to provide hedges for such events? For example, should one utilize long positions in deep out-...
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Forecasting accuracy in one month and hedging
I am working on predicting the daily data of a financial time series $[Y(t+1),...Y(t+j)]$ =$f(X_1(t),...X_1(t-i),.....,X_n(t),...X_n(t-i))$ where $Y$ is a commodity price $X_i$ are predictor variables ...
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Risk Capital and Minimum Variance Hedge Ratio
I understand that the minimum variance hedge ratio minimizes the second moment of the portfolios. My question is how is it related to the size of the risk capital (which is calculated as the Value at ...
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1answer
70 views
Hedging with forward contract
I am wondering what strategies that can be used in hedging with forward contracts in commodities market.
I only need to buy the forward contract (long position), let's say a one month contract. So my ...
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Is Vega hedging a complex derivative self financing?
Let's consider an incomplete market where I am pricing a complex derivative (Say a Bermudan). I hedge vega by a vanilla option(S). Let's say at t=1 I want to re-hedge. However, I have no guarantee ...
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Hedging a short position in the Lookback Option
SOLUTION
I got the correct answer using this formula
$X_2(HH)=(1+r)*[X_1(H)-\Delta_1(H)*S_1(H)]+\Delta_1(H)*S_2(HH)$
$(1+0.25)[2.24-(.06667*8)]+0.06667*16=3.20$
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Bond Hedging: PCA and regression based hedge ratios
This is my first question and I would very much appreciate any help.
For a project I am trying to compare different hedging techniques for hedging a long portfolio of bonds.
I have a history of ...
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20 views
Bond CSA hedging risk
If I have a CSA that contains say GBP Gilts and GBP cash, how do i hedge the risk that the gilt funding cost goes up.
Lets say my portfolio is > 10 years.
Let's assume I have a discount curve that ...
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1answer
69 views
How can you possibly profit from hedging, in view of Algorithmic Trading?
To wit, doesn't hedging necessarily break even or lose money? I assume the semi-strong form of the EMH, defined in Zvi Bodie, Alex Kane, Alan J. Marcus. Investments (2018 11 edn). p 338.
The ...
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2answers
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Hedge backtesting: ex-ante Beta vs observed Beta (is this even possible?)
A global equity portfolio has for objective to outperform a benchmark (MSCI World). I hedge the sensitivity of the portfolio to MSCI World (the beta) so that only the alpha remains unhedged.
The ex-...
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1answer
61 views
Why would a 15Y swap index=EUR3M and discount=OIS, show only a EUR3M-delta at 15Y
When computing the index-delta for a swap in a multi-curve framework, only the last cash tenor seem to show sensitivity. Could anyone explain with formulas why it is the case ?
For example a 15Y swap ...
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1answer
52 views
Measuring Hedge Effectiveness
So I was trying to estimate the performance of a static hedge vs dynamic hedge in the electricity market and I came up with some weird findings. When I used the minimum variance hedge approach using ...
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31 views
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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44 views
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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1answer
77 views
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
69 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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1answer
183 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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1answer
74 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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1answer
162 views
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
64 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
65 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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106 views
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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114 views
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
742 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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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
82 views
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
205 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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92 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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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 ...
