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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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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Delta hedging and PF-value
Imagine buying a call option and shorting the delta. After some time $dt$, the stock price changes, and so does the delta and the call option value. We re-adjust our hedge using this new delta.
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Hedging cross gamma
I understand how to hedge delta and gamma risk. Could someone explain to me how cross gamma hedging is done by the trading desk. In particular I am interested in hedging for interest rate exotics. So ...
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Example of optimal delta hedging in G. Barles, H.M. Soner option pricing paper
There is a paper Option pricing with transaction costs and a nonlinear black-scholes equation by Guy Barles and Halil Mete Soner. And there is a section about optimal (delta) hedging, which I do not ...
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Motivation for hedging volatility using VIX ETNs
I wondered what the motivation for professional investors could be to trade in VIX ETNs.
Why would they even think about trading this kind of product? (They normally should have access to VIX options,...
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What is the correct hedging strategy using futures?
In practice, even without maturity and underlying mismatch, hedging using futures does not always require a one-to-one hedge ratio. Tailing factor needs to be considered. Suppose the current spot ...
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Calculating the Hedge Ratio
Suppose we have an index whose value is calculated by a weighted geometric mean. Now we want to recreate the index using its underlying components. How would we go about calculating the hedge ratios ...
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Using cumulative returns to hedge against the overall trend
I am curious about a hypothetical strategy where you are long for a given period (like a year), and at the same time you hedge against the overall trend by going short everyday and accumulating the ...
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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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558 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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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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Creating a Beta-Neutral Portfolio
Given a portfolio of assets (say 10) and trading signal (1=Hold):
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How market making in Index options is done?
I have been thinking about this one for last couple of days. With options on share we hedge on cash and the underlying equity as per Black-Scholes formulation.
But I am confused on Index options. ...
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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 ...
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Why aren't ETNs always listed with an inverse ETN?
Exchange Traded Notes (ETNs) are often issued to give buyers exposure to an index that cannot be easily constructed from liquid securities. (If an index can be constructed from liquid securities it ...
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597 views
Example of delta one products
Not sure if this is the right place to ask such question.
How close to 1 should the delta be in order for the product to be classified as delta one.
2.What examples of delta one products are there?
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Who Uses American Options?
...in other words, why would a person want to have the right to exercise an option early? What advantage does that really give you? Are Euro-style options not good enough for some people? Who are ...
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818 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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1answer
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duration hedging of illiquid bonds
Let's say that I have a totally illiquid 30Y bond that I want to hedge with short-dated bonds and that the market is liquid up to 10Y bonds.
After 20 years, my 30Y bond will become a 10Y bond so I'll ...
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104 views
Mathematical definition of a hedge?
For two given portfolios/trading strategies I want to know what criteria need to fulfilled in order to call the one portfolio a hedge to the other. In other words; what is the mathematical definition ...
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140 views
How to hedge an off-the-run bond?
Let's say we have an 11-year off-the-run Treasury bond, but we only have access to on-the-run Treasury bonds. How do we hedge?
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Vega hedging with implied volatility smile
I have a problem with vega hedging.
Consider the management of an exotic derivative, such as Barrier option. Typically we do the following tasks:
selecting a pricing model, say, a local volatility ...
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1answer
598 views
ETFs have lower tracking error than Futures?
I used the daily returns of SPX Index, SPY US Equity, and SPA Index. I then calculate their standard deviation as hedging instruments with respect to SPX Index, i.e., (spx_ret - spy_ret) or (spx_ret - ...
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Hedging credit risk using Put equity options
I am looking for some paper or similar which deal with this topic: hedging bankruptcy on firm's debt using Put options written on that firm's equity price.
This should be based on the assumption that ...
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hedging two bonds in different currencies with FX forward
Is there a way to make a hedged portfolio using two bonds, one is in EUR, the other one is in USD and FX forward contract? Assume that FX rate follows geometric Brownian motion movement.
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What kind of entities use exotic derivatives, and do they serve any purpose other than hedging risk?
I work in a sell-side bank in derivatives modeling. My work involves modeling and pricing of exotic derivatives and I often wonder who are the buyers of these products.
From my research, I found that ...
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How do I derive a blend of a 3Y future and 10Y future risk?
So I have a portfolio of Govt. bonds that I'm trying to hedge with futures. Let's take one of the bonds out of the portfolio as an example.
In bloomberg, every bond and its future counterparts has a ...
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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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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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107 views
How does gamma trading depend on $K$?
If we think realized vol > implied vol, then we might go ahead and delta hedge a call, hoping that profits from gamma outweigh the decay.
Question: What should $K$ be on the call? ATM? If so, why? ...
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I have an interview for an assistant trader, need your help with some questions
Hello all hope you're doing fine!
Would you please help me answering these questions?
1) We're short a call option and we delta hedge. We know that there will be a move in the underlying asset ...
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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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1answer
318 views
How to hedge a put under the Black-Scholes model?
To hedge a call, one would invest the option price proceeds into $\Delta_t*S_t + B_t = c_t$. (ok)
However, a put has negative delta, so I would short $\Delta_t*S_t$ and invest $p_t+\Delta_t*S_t>...
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hedging correlated instruments
If two instruments have a significant negative correlation but the percent change in the price of the instrument moving in positive direction is always more by a fraction than the one moving in ...
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Pricing Principle 1
In Tomas Björk's Arbitrage Theory in Continuous Time (or here), $\exists$ this Pricing Principle.
Is the one in red supposed to be the proof of the Pricing Principle 1? Or merely an intuitive ...
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Can a portfolio value consisting of longing a delta shares of stocks and shorting a call option greater than strike price?
While trying to implement Black-Scholes delta hedging for a European call option using Python, I came across the following phenomena:
Given a portfolio consisting of longing a delta shares of ...
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1answer
164 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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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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1answer
110 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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304 views
How to measure effectiveness of CDS hedging
In a fixed income emerging markets portfolio investing in Sovereign and Corporates, CDS on governement bonds are used for hedging credit risk.
To be clear CDS are used to hedge both the exposure of ...
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If spot prices tends to be higher than futures prices, then long hedges are particularly attractive - Why?
Explain why
If spot prices tends to be higher than futures prices, then long hedges are likely to be particularly attractive
Supposed logic behind this is that if spot prices are likely to be ...
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257 views
Traders view on hedging of FX Futures with FX Forward
I would like to get a trades view on hedging a FX Forward with a FX Future by just moving the (1) FX_Spot rate and ignore the other risk factors (2) ccy1 DV01 risk, (3) ccy2 DV01 risk, (4) basis swap ...
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1answer
183 views
Is this the correct way to hedge two securities against each other?
Let's say I believe that $ts_1$ and $ts_2$ move together and I would like to pairs trade them. Am I correct in understanding that to hedge them against each other I would get their $Var_1$, $Var_2$, ...
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860 views
Hedging with interest rate futures, different duration
This is from Hull, problem 6.16.
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 days. If ...
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289 views
Am I in a long or short position in this case? (Cross hedging)
An airline expects to purchase 2 million gallons of jet fuel in 1 month and decides
to use heating oil futures for hedging.
The variance of the heating oil futures price is 1,5 times bigger then the ...
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1answer
64 views
What different techniques exist for modeling exotics near payoff discontinuities in Finite Difference method?
If you are modeling an exotic, like a binary or a barrier, and hedging it with vanillas that have strikes quite close to the exotic's strike, then a large asset step size, for example, $\delta S = \...
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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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Garch models - are they useful for hedging? If so how?
I understand that Garch models are useful to predict volatility. But are they useful for hedging in practice? If I want to hedge volatility, why shouldn't I just use a Variance Swap?
In other words, ...
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Finding a PDE for an option $V(t,r(t),S(t))$
I have 2 approaches in my mind for finding a pde of an option that depends both on the short rate as well as the stock price- $V(t,r(t),S(t)$. Are these equivalent?
Find a hedging portfolio by ...
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Bond Hedging: PCA and regression based hedge ratios
This is my first question and I would very much appreciate any help.
For a project I am trying to compare different hedging techniques for hedging a long portfolio of bonds.
I have a history of ...
