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)
378
questions
1
vote
1answer
75 views
Delta Hedging with a Different Underlying
In Bouzoubaa and Osseiran page 68 equation 5.3, the authors discuss delta hedging a call written for asset $S_1$ using a different but correlated underlying asset $S_2$. The authors provide the ...
0
votes
0answers
84 views
Replicating a bond
In Shreve's Stochastic Calculus for Finance Volume II, section 6.5, page 273, Shreve talks about pricing a zero-coupon bond.
A zero-coupon bond is a contract promising to pay a certain "face&...
0
votes
1answer
42 views
How to price OTC swaps to hedge non-economic cashflow variability
Suppose we have a stochastic cashflow $X_t$ from a portfolio of contracts with clients. We can simulate from $X_t$ and can calculate $E[X_t], \forall t \in [1,n]$ where $n$ represents the longest ...
0
votes
2answers
83 views
Gamma PnL when hedging with implied volatility - where is the mark to market PnL?
It is well known that hedging with implied volatility involves a PnL:
$0.5*(σ^{2}_r−σ^{2}_i)S^{2}*Γ_{i}dt$
In the Wilmott paper (http://web.math.ku.dk/~rolf/Wilmott_WhichFreeLunch.pdf), they imply ...
0
votes
0answers
57 views
hedge ratio, calculating exposure and perfect hedge
Hi I know how to get the hedge ratio it is 0.9 but what is the companies exposure is it just 1 million? Once I know exposure I can calculate the rest of part (a).
For part (b) I can someone explain ...
4
votes
1answer
160 views
How do you price an option on fresh corn?
I'm preparing for quant interviews, and I had this question for myself. I'm not actually trading corn options. My goal here is just to better understand how to deal with these kinds of options.
...
0
votes
0answers
38 views
Backtesting Hedged Equity Portfolio with Options
I am trying to find some papers and methodologies on backtesting an Equity portfolio with broad-based index options as hedge. For example, take SPY and systematically hedge it with 9 months 30 delta ...
0
votes
0answers
83 views
Purpose of Vega Hedging
I am trying to understand the principle of vega hedging.
When should a market maker vega hedge his position ?
Let's suppose that a market maker delta and gamma hedge himself, and carries his position (...
0
votes
1answer
69 views
Is it wiser to hedge downside risk with put options on an ETF, or Leveraged ETF, of the same index?
My pre-suppositions
I must hedge against a POSSIBLE market crash. But I can't predict if and when.
I hold no beliefs on volatility.
Small caps crash faster than large caps.
My question
I plan to ...
0
votes
0answers
65 views
Why "hedging motives" and "heterogeneous preferences" are explanation for "under diversification puzzle"?
Han et al. 2021 documented something relating to the "under diversification puzzle":
Standard explanations for under diversification include hedging motives
and heterogeneous preferences, ...
0
votes
1answer
96 views
Delta hedging error in B-S (hedging with implied vol) question
I have been thinking about this for a while and am at my wits end. Now assume I am pricing a call at implied vol $s$, whereas the realized volatility is $σ$. Let $C$ be the incorrect pricing function.
...
0
votes
0answers
64 views
Simple hedging technique comparison question: forward market vs money market
I am trying to do some self studying and came across this question. I am not sure how I would analyze these hedging strategies to figure out which is better. Could you give me any help on how I could ...
0
votes
1answer
72 views
Currency hedging 3 month sterling libor futures
Each libor contract is 500,000 gbp. Can I hedge it by going short 8 gbp/usd futures per libor to hedge out currency risk considering each gbp/usd futures is 62,500 British pounds?
4
votes
0answers
107 views
Delta hedging the day before expiry
In practice, how do people usually delta hedge options the day before expiry? Would you still use the black Scholes delta and then close out the position in the underlying immediately after expiry? ...
2
votes
0answers
61 views
Net delta and gamma profile of a put spread
I have a question regarding the description in Simon Gleadall's book -- option gamma trading which you can find a copy HERE.
The following paragraph he discussed about gamma and delta profile of a ...
0
votes
0answers
37 views
Black-Scholes Call Portfolio: Bond Weight Interpretation
$$C - \frac{P(z_{1})}{k(y, \tau)} \cdot S + \frac{P(z_{2})}{k(r,\tau)} \cdot F = 0$$
$$C - \Delta \cdot + w_{2} \cdot F = 0$$
OK, so with $\Delta$ I am hedging my directional risk, but what is $w_{2}$?...
0
votes
1answer
70 views
Why are implied parameters preferred over expectations of future implied parameters?
For example, when we price options on assets under the Heston model, we often compute the volatility of the volatility of the price of those assets implied by the market at time $t=0$ using the market ...
0
votes
1answer
238 views
Trade anything?
I have a question after reading the post below.
https://www.onlinebetting.org.uk/betting-guides/can-you-bet-on-anything-you-want.html
Question:
I want to bet on a niche topic or asset or anything that ...
0
votes
0answers
74 views
General question regarding delta heding
I was wondering if I have to take the strike prices of options into consideration when doing a gamma and delta hedging.
As an example, let's suppose that I have 2 positions:
a long position call ...
2
votes
0answers
29 views
How to find percentage of FX exposure hedged through financial statements
I am analyzing a company's annual report, and wish to find the percentage of FX exposure they have already hedged. I have the following information:
The net FX exposure for 4 different years
The ...
0
votes
1answer
102 views
Barrier shift consideration in delta hedging down and in puts (PDI)?
I have a question regarding the barrier shift used when risk managing a down and in put (PDI). I'm reading Exotic Options Trading by Frans de Weert and he gave this example.
Trader is long one PDI 100/...
3
votes
0answers
101 views
Should you hedge theta?
Consider an arbitraty interest rate derivative $C$. Assume that in order to hedge it, you are allowed to construct portfolio $H$ of linear combination of simple instruments such as Interest Rate Swaps ...
7
votes
1answer
191 views
What are the most common ways that quantitative funds construct industry/style-neutral factor portfolios?
For instance, consider momentum strategies. Naive portfolio construction will likely load on large style/industry return components, which increases portfolio risk dramatically.
How do quant funds ...
2
votes
3answers
337 views
What is the point of hedging in this scenario?
I'm new to this stuff, and have the following question:
In John C. Hulls book the following scenario is presented: on May 15 we enter into a contract to sell 1 mill barrels of oil for the market price ...
12
votes
2answers
2k views
Mark Joshi's book - quant interview questions
I am currently doing the question on pricing the option with payoff:
$$\max (S(S-K),0).$$
On the relevant question section, it's asked why would a bank be reluctant to sell such option? I can't really ...
0
votes
2answers
161 views
Implementing a hedging strategy for oil future options
I am currently writing a paper examining two models for pricing options on WTI Crude oil futures, and I want to backtest hedging strategies from both model and compare them against each other.
However,...
2
votes
0answers
32 views
Empircal data analysis delta hedge error of Black-Scholes by Mark Davis
Regarding Mark Davis derivation of the delta-hedging error occuring in the black-scholes as a result of difference in realized volatility and implied volatily. The formula reads as follows:
$$ Z_t = \...
0
votes
1answer
196 views
A decent model to calculate hedges
Is there an option pricing model that wouldn't be too time consuming to set up in Python (for example) and that would provide better delta hedges than Black-Scholes? This would be mainly for equity ...
0
votes
0answers
30 views
delta hedge asset exchange option with futures on spreads
say I have an option that exchange A with B. If I can only hedge it using futures on the spreads between them, how would I do it?
2
votes
1answer
201 views
FX Hedging costs when using 3m FX Fowards vs XCCY swaps for an IG Bond
Suppose I want to hedge the FX exposure of an USD Corp Bond(held to maturity) to GBP and I can choose between rolling 3m FX Forwards and XCCY swaps. How can I estimate the difference in the hedging ...
2
votes
0answers
69 views
Are there any studies on the link between energy markets and hedging-strategies for Cryptocurrency mining?
Full Disclaimer: I first asked this question on Bitcoin.SE, however I feel like my question is more relevant to this site as there would be wider knowledge and insight of some better sources or ...
1
vote
1answer
165 views
Delta hedge error black-scholes by Mark Davis
I'm currently reading a paper by Mark Davis in which he talks about a delta hedging error in the Black-Scholes formula.
The delta hedging error is given expressed as $Z_t$ with the formula:
$$Z_t = \...
3
votes
2answers
184 views
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 ...
0
votes
1answer
156 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 ...
0
votes
0answers
34 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 ...
3
votes
1answer
133 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 ...
3
votes
1answer
144 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 ...
0
votes
0answers
69 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 ...
2
votes
0answers
70 views
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
$$dS_{1}...
2
votes
5answers
653 views
Who hedges (more): options seller or options buyer?
When the open interest increases, this means that there is a buyer and a seller of that option.
Both seller and buyer are behooved to hedge their positions, with the opposite sign; but I doubt that ...
0
votes
2answers
120 views
Best way to lock in margin rate via hedging
I'm currently paying a 1.25% margin rate. This rate is based on the Fed Funds rate plus a margin. I would like to hedge against the possibility of this margin rate increasing. What is the best/...
1
vote
0answers
52 views
How does a hedged portfolio account for other greeks?
So a classic delta-hedged portfolio on a call option is:
$$-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 + \...
0
votes
1answer
49 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.
6
votes
0answers
93 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 ($B = (B^1, B^2, B^3)$...
0
votes
0answers
46 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):
$$
S_{T} =S_{0}e^{(...
9
votes
2answers
712 views
ETF Market Making - Locking profits via hedging
I am interested in deeply understanding the way ETF market makers operate to profit. I already know that market makers profit from buying at the bid price and selling at the ask price, and I am also ...
1
vote
1answer
127 views
Calculating vega in Heston?
I often see Vega in the Heston model specified as:
\begin{align*}
\nu & =
\frac{\partial C}{\partial v} =
\frac{\partial C}{\partial v_0} 2 \sqrt{v_0}
\end{align*}
where $v = \sqrt{...
5
votes
1answer
162 views
Hedging strategy for payoff $\int_0^T\log S_u\mathrm{d}u$
What would a hedging strategy look like for a payoff $\int_0^T\log S_u\mathrm{d}u$? I have determined under Black-Scholes stock dynamics,
$$\int_0^T\log S_u\mathrm{d}u=\int_0^t\log S_u\mathrm{d}u+\...
1
vote
2answers
200 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 ...
2
votes
1answer
1k 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 ...
