Questions tagged [hedging]
Financial strategy used to offset potential monetary losses or volatility.
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Continuous delta hedge formula
When we buy a call and continuously delta hedge using some implied volatility $\sigma_i$, what is the formula for our aggregate profit given that the actual realized volatility is $\sigma_r$?
Say $...
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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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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 +/...
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Dynamic Hedge of Quanto Options
Can anybody explain to me step-by-step how can I dynamically hedge and/or replicate a quanto option with the foreign underlying asset, the foreign cash account and the domestic cash account as ...
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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 $S$...
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derivation of the hedging error in a black scholes setup
I'm reading the following short paper by Davis. In section 2.6 he wants to derive an expression for the hedging error. Assume we have Black scholes setup:
$$ dS_t = S_t(r dt + \sigma dW_t)$$
$$ dB_t =...
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Using a call-spread to hedge a digital option
I have a digital option that pays out \$1M at time $T$ if the price of the underlying stock is higher than \$1300 (with current price ~\$1000) and, obviously, zero otherwise. I am in the Black-Scholes ...
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Exotic option arbitrage
Suppose an exotic European option has a sub hedging (price being lower than the target) portfolio of vanilla European options all with the same expiry as the exotic option. The sub hedging portfolio ...
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Hedging in the Heston Model
I have simulated an underlying stock price, $S_t$ and a stochastic variance process, $v_t$ with the following stochastic differential equations from the Heston Universe:
$$
dS_t = \mu S_tdt + \sqrt{...
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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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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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Ito lemma of Convertible Bond under Two-factor Model Interest Rate
@Behrouz Maleki has provided the PDE of two factor model in other post so
could anyone please provide Ito lemma of this equation and how this PDE was derived from Vasicek model. as far as I know it ...
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Delta hedging on Barrier/Digital Options
I would like to adress a question I have in mind and I didn't found a clear answer online.
When we deal with Barrier or Digital Options we have a discontinuty in the payoff, so that the derivatives (...
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When does delta hedging result in more risk?
A question from an interview book:
When can hedging an options position make you take on more risk?
The answer provided is the following:
Hedging can increase your risk if you are forced to ...
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Hedging stocks with VIX futures
It seems that VIX futures could be a great hedge for a long-only stock portfolio since they rise when stocks fall. But how many VIX futures should I buy to hedge my portfolio, and which futures ...
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is beta of a portfolio always meaningful?
Consider the following strategies:
a stat arb strategy with no overnight exposure, but significant market exposure intraday.
a market timing model which is always long or short the market.
etc
is it ...
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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 ...
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Replicating a portfolio with a certain payoff function
Assume there are two stocks $S_1$ with price $p_1(t)$ and $S_2$ with price $p_2(t)$ where $t$ indicates time. Assume, there is a hypothetical derivative $D$, which is such that, price of $D$ at a time ...
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Debunking risk premium via "hedging" argument? (or why even in the real world $\mu$ should equal $r$)
Since I began thinking about portfolio optimization and option pricing, I've struggled to get an intuition for the risk premium, i.e. that investors are only willing to buy risky instruments when they ...
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How to Delta Hedge with Futures?
The theory of delta hedging a short position in an option is based on trades in the stock and cash, i.e. I get the option premium and take positions in the stock and cash.
In the classical no-...
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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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Greeks: Why does my Monte Carlo give correct delta but incorrect gamma?
For a vanilla European call, my Monte Carlo method gives the right option price and delta but the wrong gamma. In particular, the value of gamma varies wildly each time I run the method. I estimate ...
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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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How to tail a hedge? (Question 3.26 from Hull, edition 10)
I am new to finance so I apologize if my question is really basic (which it probably is). If this is not the right "stackexchange" group for this, kindly refer me to the right one.
Let's say you own ...
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Why are there two expressions for the Black-Scholes hedging portfolio
I am new to derivatives pricing and am trying to understand why there are two different expressions for the Black-Scholes hedging portfolio. The first approach, used in books like Hull, stipulates ...
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Hedging, Delta, Gamma, Vega
I sometimes find it difficult to see, how to hedge a portfolio.
Let say, that I created a product consisting of an Asian call (strike 1), Vanilla call (strike 2), and an Asian Put (strike 1) on a ...
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Discrete time option gamma hedging
1) An option $V$ under the Black-Scholes model is perfectly hedged when it is delta hedged continuously with the underlying $S$. When the hedging time is discrete, the delta $\Delta$ needs to take ...
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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”?
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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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Constructing a hedging strategy for an American option
Question:
Consider the following model, where $r=0$, and a dividend of 1 unit of currency is paid at time 1.5.
$$
\begin{array}{|c|c|c|c|}
\hline
& S(0,\omega) & S(1,\omega)^* & S(2,\...
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Reference for why a derivative is a derivative and not say an insurance contract
I recently spoke to an options trader that tried to demonstrate option pricing by considering a random walk of balls dropping down a lattice so the underlying stochastic process is a simple random ...
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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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