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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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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28 views
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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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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102 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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112 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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30 views
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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1answer
107 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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1answer
128 views
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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55 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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583 views
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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60 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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49 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?
$$-C - \Phi(d') \cdot B + \...
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41 views
Non convertible currencies and trade
How importers and exporters sell/buys products if their country currency is non convertible or when non residents want to invest in the country? For example in Brazil.
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Non attainable claim - Incomplete market
I am wondering whether there is a standard procedure to find a non attainable (i.e. non replicable) asset in an incomplete market.
As an example, let us have the following market ($B = (B^1, B^2, B^3)$...
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Which exact interest rate should I use for valuing equity index futures (ie. SPX, MXEA)?
I'm trying to build a model that values futures for equity indicies like SPX. For example, this product link here. I know that the model is simple (please correct me if I'm wrong):
$$
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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1answer
91 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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1answer
124 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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2answers
120 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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31 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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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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1answer
842 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 ...
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300 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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56 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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1answer
143 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
69 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
368 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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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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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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103 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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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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1answer
123 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
71 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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144 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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1answer
193 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
321 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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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
38 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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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 ...
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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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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
187 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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121 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
224 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
386 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 ...
