Questions tagged [hedging]

Financial strategy used to offset potential monetary losses or volatility.

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Two types of hedge : impacts on position carry

Think of an IG bond purchase, financed at 3M Euribor, in an inverted curve environment. The yield on the bond, Y, is below the 3M Euribor, at purchase. The investor is looking to lock in a spread over ...
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Constructing a monthly option from quarterly options and monthly futures

Say we have quarterly options and monthly futures where the strike price is based on the average price of spot during the corresponding period. There are no monthly options. Can I effectively ...
3 votes
1 answer
3k 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 ...
1 vote
2 answers
468 views

Gamma smoothing of vanilla options

I want to ask a question about the answer provided here: https://quant.stackexchange.com/a/35211/61083. I'm wondering if there is mathematical proof as to why it is working. Meaning if I reprice a ...
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1 answer
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Long Bond & Interest Rate Futures Hedge - is it carry negative?

The situation is the following : A bank treasury book, finances its cash bond liquidity portfolio at Euribor 3m flat. The Euribor curve is deeply inverted. The bank invests in bonds with a positive ...
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About Hedging of One-touch Options

The pricing of American Digital Call (one-touch Calls) has the following formulas, taken from P13, the textbook \begin{aligned} C_{\mathrm{d}}^{\mathrm{Am}}(S, t ; E) & =\left(\frac{S}{E}\right)^{\...
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Are these two hedging strategies equivalent?

I am looking at two strategies for hedging interest rate risk, and I need some help to show whether they are equivalent or not. The aim of the hedging programme is to hegde the 10yr risk free rate in ...
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1 answer
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Can you hedge against a short squeeze with call options?

https://finance.zacks.com/high-short-interest-ratio-potential-sizable-short-squeeze-3371.html claims you can hedge against being squeezed out of your short position by buying call options with a ...
1 vote
1 answer
123 views

Hedging gamma, theta or other risks

Speaking on a high level, in the Black-Scholes model the $f\left(T,S_{T}\right)$ payoff's value dynamic is given by $$df\left(t,S_{t}\right)=\left(\frac{\partial f}{\partial t}\left(t,S_{t}\right)+\...
1 vote
2 answers
306 views

ETF Market Making Hedging

Suppose I am a market maker making a market on an S&P ETF. Suppose that I have calculated a fair ETF price of $395. My market therefore is 394.90 (bid) and 395.1 (ask). After my bid is posted I ...
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70 views

How do currency hedged ETFs work?

I am trying to understand how currency hedged ETF returns work with a simple example, namely, that where a Swiss investor can choose between buying a S&P-500 index fund which either a) hedges the ...
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1 answer
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Portfolio Optimization with ETFs and Futures

I am looking to perform portfolio optimization with a single ETF (or two) and a VIX futures (with the possibility of adding an additional hedging instrument). Here are some features of my portfolio ...
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1 answer
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Calculate minimum variance hedge ratio for foreign-denominated asset hedged to domestic currency

The formula for minimum variance hedge ratio (MVHR) is conceptually the correlation multiplied by the ratios of volatilities. correl (Y,X) * (STDEV Y / STDEV X) ...
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1 answer
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WN 30Yr UST Futures Conversion Factor vs Delivery Ratio

What is the logic behind using the conversion factor in determining the hedge ratio of deliverable bonds in 30Yr UST futures (WN contracts) throughout the trading life of the contract, but then having ...
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1 answer
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Hedge a down-and-in BTC put?

What’s the best way to hedge a down-and-in BTC put? I am not quite sure what the best practice here would be and would love to get some guidance. Thanks
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How were very large short volatility positions hedged?

This question came from an actual trade occurred in about 2014 when PIMCO sold very large positions in SPX 1840 put/1920 call strangle. It was reported the premium alone was worth \$100 million (they ...
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Should I resolve factor collinearity before hedging?

Goal: I want to run a portfolio, daily or weekly rebalanced, with a target idio vol %. Thus I will be market neutral, sector neutral and maintain some style exposure at 70-80% idio overall. Okay, this ...
1 vote
1 answer
245 views

Hedging exotic options

How can exotic and other path dependent, such as asian options be hedged? For example in the case of an asian option, what is the replicating portfolio: what instruments to keep in it and “how much”? ...
16 votes
3 answers
10k views

What really is Gamma scalping?

How does Gamma scalping really work? It seems there is no true profit scalped. If we look at the simplest scenario, Black-Scholes option price $V(t,S)$ at time $t$ and the underlying stock price at $S$...
2 votes
1 answer
105 views

Cash balance sign in hedging portfolio

Consider a derivative which depends on $n$ assets with price vector $X=(S^1,\dots,S^n)$. The derivative value $V_t$ is given by the function $v(t,S)$, so that the hedge ratios for the hedging ...
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Hedging FX Risk of a fund

I manage a mutual fund where the underlying assets (or the shares i buys) are in USD, and my mutual fund is in CLP (Chilean Pesos). How can i hedge this fx risk without affecting the return of the ...
0 votes
2 answers
217 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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1 answer
87 views

Any other ways to hedge a bond portfolio against interest rate risk? [closed]

I'm currently taking a (gentle) intro to derivatives class. One of the exercises asked me to discuss duration as a risk measure and to provide alternative methods of hedging a bond portfolio against ...
6 votes
3 answers
2k views

How do we hedge option vega practically?

Suppose I’m a market maker, and I collect some spread buying an option due the flow I get. In this example, I must always quote. I want to hedge as much of the risk as possible over the lifetime of ...
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1 answer
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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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1 answer
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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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Delta Gamma Hedging Portfolio of Multiple Options Derivation

I am trying to make the correct derivation of the Delta Gamma Hedge of a portfolio composed of a multi-option strategy, like a Straddle with the following parameters Long 1 Call K = 100, Long 1 Put K =...
2 votes
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Delta hedge call option on short rate

Usually delta hedging an european call option in the black-scholes model is constructed of three assets; a call option, the underlying stock and the risk-free asset often assumed to have constant ...
7 votes
3 answers
292 views

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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1 answer
875 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. ...
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117 views

Backtesting One-Factor HJM model with selling European Receiver Swaption

I am attempting back test the performance of a model - namely the Musiela equation used to model instantaneous forward rates with constant time to maturity: $$r(t,x)=r(0,x)+\int_0^t\left(\frac{\...
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2 answers
475 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 ...
3 votes
3 answers
2k 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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equities hedging betas for a cross-sectional risk model

This question is on equities risk models. I would like to know how to define betas when using a cross-sectional regression approach, rather than the time series approach. My goal is beta hedging of a ...
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1 answer
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In a CRR model, find the Initial investment of the hedging strategy

Given a Cox-Ross-Rubinstein model with $T=10$, $u=1.1$, $d=0.9$, $r=0.02$, $S_0=100$ and a European call option with Strike $K=220$, find the initial investment of the hedging strategy. I know how to ...
6 votes
2 answers
3k views

Static and Dynamic Hedging of Vol/Var Swaps

Why can a variance swap be perfectly statically hedged whereas a volatility swap requires dynamic hedging? Possible reference request to the corresponding literature.
4 votes
2 answers
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How do energy companies measure the magnitude of the risks of buying energy at a variable price and selling it at a fixed price?

Power and gas retailers are exposed to a variety of risks when selling to domestic customers. Many of these risks arise from the fact that customers are offered a fixed price, while the retailer must ...
0 votes
1 answer
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What is your exposure when you sell a binary option

I recently made a post that was closed right away because it wasn't focused and asked too many questions. In that post, I asked five questions that were related but different. It looks like stack ...
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3 answers
1k views

Fixed vs float swap interest rate risk

I have some technical questions about what are the best settings in Bloomberg to calculate the interest rate risk of a swap. When Bloomberg calculates the DV01, it simply bumps the par swap curve by +/...
6 votes
3 answers
447 views

Relationship between options open interest and spot price movement

The hypothesis that I am mulling over (and more so, its effect on stock price movement) is the following. Hypothesis: Buyers of options do not hedge (as they don't need to) while sellers usually hedge ...
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Where can I learn more about market-making strategies? [duplicate]

I have some experience trading both sides of an order book, but not simultaneously in the same security (and certainly not at the size large market makers do.) I've searched pretty extensively for ...
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1 answer
195 views

Hedge by shorting stock

Is it possible to explain to me why the formula is $r_A-hr_B$? My interpretation is that, you short stock B (by selling it), and then you use the money to buy stock A. Thus we have a $r_A$ term there....
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Where am I going wrong with the calculation of conitnuous PnL from delta hedging?

I am trying to work out the PnL of continuous delta hedging. I saw This link to an answer here, however, I obtained a different answer without resorting to Black Scholes, which I will outline below. ...
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1 answer
372 views

Dynamic Hedging

I am reading page 126 (Chapter 8) of the book "Option Volatility and Pricing 2E" by Sheldon Natenberg and have two questions I seem to be stumped on. (The bulleted text below the charts in ...
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2 answers
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Should one use the 30y bond alongside shorter tenors to hedge a MBS book?

Say I build a US treasury curve or swap by bootstrapping 2/3/5/7/10/20/30y on the run bonds. Say I have a prepayment model and an OAS model and I can generate key rate dv01s for the book as dBookNPV / ...
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Why reduce number of short contracts to reduce beta, and take long positions to increase it?

My question is about chapter 3 in the ninth edition of "Options, futures and other derivatives" by John C. Hull, subchapter 5 under the heading "Changing the Beta of a Portfolio". ...
1 vote
1 answer
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Conditions for market completeness

We know that a market is called complete if it is possible to replicate any future payoff trading in its securities. Is there an exhaustive list of requirements that when satisfied imply market ...
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Unhedged factor models in trading

Suppose I have a factor model that takes in unemployment and GDP as $X_1, X_2$ respectively in estimating the fair price of asset $Y$. Say I observe that the market price of $Y$ has deviated ...
1 vote
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Updated Methods for deriving the "front month equivalent" series in commodities derivatives

It is common in commodities markets to hold many positions, both long and short, across a range of contract months beginning in the prompt month to five or more years out. [My question is:] What is ...
2 votes
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Exact delta-hedging for endogenous payoffs

I would like to derive the exact delta-hedging strategy in the Black-Scholes market to replicate the following non-standard endogenous payoff. The particularity is that the payoff does not only depend ...

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