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)

Filter by
Sorted by
Tagged with
2
votes
1answer
165 views

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 ...
2
votes
1answer
275 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 ...
2
votes
1answer
188 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 $Var_1$, $Var_2$, ...
2
votes
1answer
974 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 ...
2
votes
1answer
304 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 ...
2
votes
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 = \...
2
votes
0answers
59 views

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, ...
2
votes
0answers
63 views

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 ...
2
votes
0answers
114 views

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 ...
2
votes
1answer
61 views

Cash account growth in Burgard & Kjaer (2011)

I am rereading [1] and there is something I cannot get my head around this time. In Section 3, page 6 of the paper, they derive the growth of the cash account when the hedging portfolio includes the ...
2
votes
0answers
561 views

Replicating portfolio with stock, bond and call option

I am trying to interpret: I am having trouble interpreting the replicating strategy: Context: $\phi$ is a generic payoff function, 0 < S < $\infty$, assumed throughout to be twice ...
2
votes
0answers
68 views

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 ...
2
votes
0answers
70 views

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 ...
2
votes
0answers
279 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 ...
2
votes
0answers
146 views

How to verify if beta “works” for hedging?

Suppose you want to calculate the beta of a stock to an index using weekly returns. If the stock is sufficiently volatile, and you use few enough observations, it is possible that the absolute value ...
2
votes
0answers
192 views

Using PCA to identify proxies for highly illiquid assets?

Was wondering if anyone had any literature to share on the use of PCA to identify proxies for highly illiquid assets? Say for example I have sold an option on stock A, an index constituent, and would ...
2
votes
0answers
146 views

Need some suggestion about short vxx long vx future strategy

I read a post by M. Avellaneda trading volatility At page 59-62 there's Strategies with VIX futures to hedge short VXX I'd like to reproduce the result. I am not sure how to do it. Some key points ...
2
votes
0answers
186 views

Relative Value Trading of American Style Options on Futures, Calcuating hedging ratios?

I am interested in Relative Value Trading of American style options on futures and have not found a whole lot of literature on it. The best resource I have discovered so far is a few pages in Colin ...
2
votes
0answers
108 views

References about market neutral portfolios that isolate unsystematic risk

I am looking for references, information, backtests etc. about market neutral portfolios that go long the index and short stocks of that index with high unsystematic (idiosyncratic) risk. The idea is ...
2
votes
0answers
48 views

Portfolio Hedging under Uncertain Correlations

I have a portfolio ($w_0=1$) and two hedging assets ($w_1,w_2$) and a co-variance matrix for the three $\Sigma$. However the co-variance $\Sigma$ is only an estimate. For fairly well behaved assets (...
2
votes
0answers
67 views

Portfolio optimised for diversification and regular yield. How to hedge?

Here is a portfolio optimisation for equity dividend and yield designed to diversify holdings and produce regular monthly returns using only ETFs complete with R code. http://prescientmuse.blogspot....
2
votes
0answers
217 views

Market Exposure and Hedging

Normally the Market exposure associated with your stock/portfolio is your delta for that stock/ portfolio. Basic idea of hedging involved here is buying/selling respective futures depending upon ...
2
votes
0answers
498 views

Delta-Omega Hedging [closed]

I am currently trying to understand the in's and out's of options and more specifically hedging. I came across a document that was talking about Delta Hedging which is just making sure the delta of ...
1
vote
3answers
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 ...
1
vote
2answers
96 views

Why do (life) insurance companies face equity risk?

I am currently reading through a study published by the Institute and Faculty of Actuaries on hedging practices within the insurance industry. Within the executive summary, under 'Key Risks', it is ...
1
vote
2answers
568 views

BS and delta hedging questions

I have two related questions concerning Black Scholes and delta hedging. I thought about this two questions, but I could not come up with an answer, so maybe you guys & girls can help me: If an ...
1
vote
3answers
145 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 ...
1
vote
1answer
968 views

How does one calculate the Libor future contract price?

I have the following question 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 ...
1
vote
1answer
147 views

why does index futures swing more than index?

why does index futures swing (in absolute) more than index, when index futures price is lower than index (Backwardation)? Say, SET50 Index(Thailand) is at 950, SET50 active Futures will be at around ...
1
vote
1answer
2k views

Why is delta-hedging of ATM options near expiry difficult to do? [closed]

Can someone explain to me why the delta-hedging of ATM options near expiry is difficult?
1
vote
1answer
67 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{...
1
vote
1answer
110 views

Which currency to hedge a position in FX options?

Let's assume a bank sells to a client a put of \$1,000,000 dollars on USDJPY at 110 in 6 months. The delta of this put is -0.6, spot is 112. So to hedge its position the bank has to short \$600,000 ...
1
vote
1answer
771 views

Can I replicate put option by trading futures?

Very basic question. Imagine I have some BTC (which is a bubble but I can't get rid of), and some money on an account which allows me to hedge with CME BTC futures. The problem is that if bitcoin ...
1
vote
2answers
163 views

EuroStoxx50: long index and short futures

If you look at a cumulative return of a very simple portfolio, consisting of long EuroStoxx50 total return index and short EuroStoxx50 futures, you can see that over the last 10 years this portfolio ...
1
vote
1answer
44 views

Do not understand 'The gain (loss) on the stock position would then tend to offset the loss (gain) on the option position' [closed]

Currently, I am reading John Hull's Options, Futures and Other Derivatives. On page 401, the author mentions the following: Suppose that the delta of a call option on a stock is $0.6$, stock price ...
1
vote
1answer
107 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 ...
1
vote
1answer
101 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 ...
1
vote
1answer
172 views

What time series and length should be used for a second-order derivative?

Let's suppose that there is an option on a futures contract, the underlying asset for the future is an index, and the future is a cash settled contract. In this case you have a second-order ...
1
vote
2answers
232 views

Is a linear hedge sufficient for most purposes?

I was in a lecture of Bruno Dupire's when he said something along the lines of a linear hedge being sufficient for most purposes. He gave a counter example as well: a corporation producing something ...
1
vote
2answers
185 views

hedge a USD index into EUR

Say I have the daily index levels for the S&P. It is then very simple to calculate the daily returns. I however want to calculate the hedged returns into Euros. I have the daily exchange rates ...
1
vote
2answers
246 views

M&A hedging an equity portfolio against an index

Quick Note This question was already posted under the userID user8170. Reason being I could not access my account. Now I am able to login to my account I am reposting the question here and will ...
1
vote
2answers
96 views

To hedge, why not simply buy puts that expire on the same date as your calls?

This r/options comment avouches that on Sept 24 2020 Someone bought 40,000 [T]esla puts. The strike price is 40 dollars so the puts will only pay out if Tesla is below \$40. The expiration date is ...
1
vote
1answer
65 views

Hedging predicted volatility

Q. If you predict the volatility of the stock is 10% a year from now and current price is X dollar, how do you hedge the risk? Im not sure why I am finding this so hard. How do we use options (...
1
vote
2answers
113 views

Repo sensitivity

Hope u're all doing well in this sanitary crisis. I have a question concerning repo sensitivity of basket/index derivatives regarding market making for instance. The argument to compute such a repo ...
1
vote
1answer
131 views

Question about using Ito's lemma in Gamma PnL

While deriving the delta hedge error if we hedge with implied vol, and the true vol is different, we say that the PnL of the call option is: $$dC=C_tdt+C_SdS+0.5C_{ss}<QV>dt - (1)$$ Where $<...
1
vote
1answer
100 views

PnL due to model recalibration and its relationship with hedging error

Consider the case where at t=0, I calibrate my model to the market, but at t=1 my model is no longer able to recover the price in the market, so it needs recalibration. Say I have delta hedged my ...
1
vote
2answers
152 views

How does a pricing model 'understand' the cost of hedging?

Suppose I am pricing a multi asset at the expiry payoff. Theoretically I define their joint distributions in the risk neutral measure, and price using expectation. However, how do I know that the ...
1
vote
1answer
67 views

What are the differences between hedging with swaps, options or futures? [closed]

For instance if a bank wants to hedge against interest rate risk, it could use interest rate swaps, or options or futures contract. Or in any other example, when a manager is hedging against risks. ...
1
vote
1answer
115 views

Why would a 15Y swap index=EUR3M and discount=OIS, show only a EUR3M-delta at 15Y

When computing the index-delta for a swap in a multi-curve framework, only the last cash tenor seem to show sensitivity. Could anyone explain with formulas why it is the case ? For example a 15Y swap ...
1
vote
1answer
465 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 2 3
4
5
7