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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318 views

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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828 views

Currency risk USD>EUR>EGP

Seeking input on hedging risk on USD to Euro with a 3rd component of payroll issued in Egyptian Pounds. We are a US corp invoicing a Germany entity in Euro with massive payroll being paid in Egyptian ...
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160 views

Hedging convexity for long-dated fixed cashflows

I'm wondering what are the different ways of hedging the convexity in fixed long-dated cashflows (maturity > last liquid point). Also, if you'd say receiver swaptions would be the way to go, could you ...
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160 views

evaluation of option pricing models based on Greeks empirical hedging effectiveness

I’ve studied many different pricing models (B&S, Vasicek, CIR, Merton jump, Heston, ecc), each of them gives as output a different price and different values for the Greeks. So, for example, if ...
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119 views

Why is the CAPM Beta defined this way - Beta hedging

Let's say I have two equity indices X and Y. Assume they are negatively correlated with some leverage. I want to hedge X with Y. I have seen many ways of computing a beta to describes the ...
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347 views

Heging against stochastic interest rate

I am working on an Index and I am trying to price Call options on it. I work with the 3 Months LIBOR as Cash. I use the following Black-Scholes formula $$C_{t} = S_{t}e^{-q_{t}(T-t)}\mbox{N}[d_{1}(t)]...
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1k views

Model calibration volatility surface

Let's say i have an exotic structure that is to be vega hedged dynamically. I choose to price it with a local volatility (which means the model prices in your future vega hedges using all options for ...
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87 views

stochastic interest rate in binomial pricing model and in continuous models

Is the interest rate allowed to be truly stochastic in the binomial pricing model and in continuous models so that we are still able to switch to the risk-neutral measure? Shreve mentions multiple ...
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516 views

Market Maker ETF Hedging Strategy

Some thoughts about ETF hedging; feel free to leave comments! Scenario 1: An investor sells 1M ETF shares to a Market Maker(MM) at bid price. MM has a long position and will need to offload the ...
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56 views

Books and techniques to hedge options that expire tomorrow?

Can anyone point me to books or resources that talk about best techniques to hedge ATM or close to ATM options that expire tomorrow. I am particularly interested on how to hedge if you are short the ...
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7k 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 $S$...
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71 views

How to properly hedge a short vol taking into account hedge stop loss?

Suppose a short straddle. In practice, hedging with long/short futures exposes to the risk of hitting a stop loss when market movements are wide. Eventually, it may very well happen that the hedge ...
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619 views

Understanding methodology behind the covariance bucket vega

I am reading "Dynamic Hedging" from Mr. Taleb. I understand that you cannot simply aggregate all the vegas of your option portfolio and classify this as the portfolio's vega. So, now I want to ...
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51 views

How should one hedge option positions on the date of expiry?

Let's say we are looking at a non-liquid equity ticker and a slightly OOM option on it. The problem is that if we buy delta to hedge it, it could move the underlying market and push the option to be ...
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48 views

How do you hedge with delta futures if payment is unsure?

A Czech company has a payable of 1,5 mil EUR that has got a settlement at the end of the current month and at the same time it is expecting a payment of 1,5 mil EUR at the half of the current month ...
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683 views

When should we delta hedge?

Let's say I'm the seller of a European call option on a non-dividend paying stock. I pocket the premium $c_0$ of the call at $t=0$. If I start to delta-hedge right away, this is equivalent to ...
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42 views

does anyone calculate substitution risk?

So a company can post collateral to borrow money (repo agreement) and they may have different options of collateral to post. I have to pay a return on their collateral while I hold it. Since, at the ...
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1answer
128 views

Static hedge for up-and-out Digital Call

I am trying to come up with a static hedge for a Digital Call with strike K that knocks out when price > barrier H. I know it will involve non-knockout digital calls with strike K and strike H but I ...
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2k views

Delta Hedging/ Exchange for Currency Options

I'm looking at 2 cases of hedging EURUSD, using call spread or range forward. Lets say spot is 1.1300 and my buy call is at 1.1300 and sell call is at 1.1500. Hypothetically I'm assuming that this is ...
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316 views

Implied Funding/Borrow Costs in Short-Dated ETF Option Prices

I'm struggling with some anomalous behavior in an analysis I'm running and was hoping for some advice/insights. I'm attempting to extract the implied funding/borrow costs from ETF option prices (say ...
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110 views

Interest Rate Futures Question from Hull, 8e

There is this question 6.16 in Hull, 8e: Suppose that it is February 20 and a treasurer realizes that on July 17 the company will have to issue \$5 million of commercial paper with a maturity of 180 ...
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368 views

Replicating the square of an option $C^2 (S,K,t,T)$

Given a vanilla options market, i.e. $C(S,K,t, T)$ for all strikes $K$, is it possible to replicate $C^2 (S,K,t,T)$? So I am looking for a self-financing portfolio which has a price equal to $C^2(S,K,...
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Uniqueness of the Hedging strategy

I am currently reading the book "Nonlinear Option Pricing" by Julien Guyon. In the book they defined an attainable payoff $F_T$ as a $\mathcal{F}_T$ measurable random variable for which there exists ...
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440 views

How to hedge a perpetual barrier option?

I have encountered the following question during my interview: How to have a static hedging of a perpetual barrier up-and-out call option in practice? Strike K = 110, barrier B = 120 for example? MY
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213 views

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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497 views

Hedging strategy for American Option

Good day, I was asked to devise a hedging strategy for an American Option given the following claims. Note, $r=0$ and the underlying stock pays a dividend of $1$ at time $t=1.5$ \begin{array}{|c|c|c|...
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2k views

Commodity Asian Swaps

I'm trying to find info about asian swaps on oil/energy products and about their pricing methods. However, all I could find are on asian options. Would be glad if you can provide me with some ...
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254 views

Principal Components Analysis on overlapping contracts

I am conducting several PCAs on the gas forward curves (months, quarters, seasons, calendars) for hedging purposes which give me some rather reasonable and stable results. However, these contracts ...
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1k views

Hedging a CDS sold

How would a bank that sold a CDS to a client hedge its position? Is there a replication method similar to what is done with option hedging or other methods used? Many thanks
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Creating a hedge portfolio out of 10 assets

Suppose I have historical return data on 10 assets. How can I create a hedge portfolio that prices all these assets in a factor model? I have chosen 3 factors: excess market return, SMB and HML from ...
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69 views

Formal proof market incompleteness under jump diffusion

Does anyone have formal proof of markets incompleteness under jump diffusion ? I am familiar with the intuitive approach as mentioned in Tankov (delta), yet I am looking for a formal approach and ...
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686 views

Hedging treasury bond with Eurodollar futures

I was reading Interest Rates Markets by Jha, and on p. 214, he describes hedging a 5 year treasury bond with a ED future strip, as described below. He says the best hedging quantity can be generated ...
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158 views

Greeks and options hedging

Why is it that theta is sometimes taken as the proxy for gamma of the underlying asset in options hedging?
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150 views

replicate option by dynamic hedging

I've just started working for a company with a decent commodity exposure. They manage this by as they call it dynamically hedging it. Basically when they start the hedging they identify a market ...
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266 views

How can I approximate the hedge ratio for Inter Commodity Treasury Spreads?

Looking at the excellent CME Treasury Analytics tool, I can see that the hedge ratio for spreads betweend diff treasury futures is derived from the DV01 of each leg. I can get treasury futures data ...
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109 views

FX Average Forward Pricing

Lookin for documentation on how to price FX Arithmetic Average Rate Forwards. Couldn't find any info on textbooks. Any help is very appreciated.
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266 views

ETF Replication

I have a question regarding the ETF replication methods. I know there are two main methods, namely physical and synthetic replications, but I would like to understand how an ETF trader can : ...
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166 views

How to compute gamma for at-the-money regular calls and puts when they approach expiration to avoid explosion of portfolio's gamma?

When and at-the-money regular call or put approaches expiration, gamma tends to infinity. However, for practical purposes, there is only a finite change in delta. The problem is that if any of the ...
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785 views

Hedging with machine learning

I’ve been thinking about an interesting problem lately: Suppose I have a position in an exotic derivative. How can I automate the hedging process? Traditionally, one build a pricing model and ...
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759 views

Tracking error Black Scholes

Suppose an asset follows the SDE $$ d S_{t}^{1} = \mu S_{t}^{1} dt + \sigma_{t} S_{t}^{1} d W_{t} $$ Furthermore assume that $r = 0$ and a trader who uses Black-Scholes for pricing and hedging with ...
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510 views

How to hedge a short VIX position with SPY

Assuming it's Nov 15th, and the SPY is trading at 217.2. Suppose I sell 11 contracts with Dec. 21 maturity. How many shares of SPY do I buy to hedge my VIX futures position?
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Hedging jump models with a infinite number of derivatives

First of all, I inform you that I am not a financial mathematician and have vague knowledge about an incomplete market. Stochastic volatility models are incomplete so derivatives cannot be ...
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309 views

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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68 views

Hedge ratio with non-whole betas

Pardon me if this is a simple question but it has been a while since I dealt with this. Last time was in my quantitative investment class. Let's suppose I have a couple highly correlated instruments $...
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509 views

Delta neutral strategy using a combination of put and call options

I am learning about quantitative finance and currently learning about delta neutral strategies. The examples given are most of the times of the form: if you buy call options, you can hedge your ...
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110 views

Cash deposit in replicating portfolio for BS equation unnecessary?

The book on Option Valuation Methods that I currently study (Higham 2013) constructs a replicating portfolio $\Pi = A(S,t)S + D(S,t)$ for deriving the BS PDE, where $D$ is a cash deposit. $D$ does not ...
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138 views

Static hedge forward swap using zero coupon swaps

I'm trying to create a static hedge for a forward swap using two spot starting zero coupon swaps (to prove that there is no convexity adjustment needed). Here are the instruments - Paying fixed in ...
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551 views

heding bond risk with swap

How would a bond trader hedge his/her interest rate risk? A nature way is to hedge it with interest rate swap. Is this a choice in practice ? is their any risks associating with this hedging strategy. ...
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2k views

Hedging with variance swaps: how to calculate the notional

Returns on an asset are negatively correlated with own variance, and I would like to set up a hedge with a variance swap (no options are traded). I need to decide on the notional of the swap: any ...
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1k views

Hedging Ratios for Fixed Income Instruments

If you buy a corporate bond and you want to hedge the interest rate risk, how would you know how many interest rate futures/swaps to hedge the bond with? The same with an MBS security, if you want to ...

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