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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290 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 ...
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what is the state of the art method for hedging barrier options?

I want to create my own Barrier options for some security, I want to trade. I did some literature review, and found a static replication method, and many dynamic replication methods. I want to know ...
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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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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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248 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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141 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 ...
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184 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 ...
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137 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 ...
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173 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 ...
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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 ...
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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....
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213 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 ...
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491 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 ...
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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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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 ...
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509 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 ...
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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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864 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 ...
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143 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 ...
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1k 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?
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92 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 ...
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436 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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674 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 ...
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154 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 ...
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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 ...
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102 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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91 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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169 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 ...
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152 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 ...
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244 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 ...
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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 ...
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106 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 $<...
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71 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 ...
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139 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 ...
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61 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. ...
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71 views

Hedging Interest rate swaps in practice

Suppose we have a portfolio of i terest rate swaps that we wish to delta hedge. we build a delta ladder by shocking the instruments used to build the forecasting and discouting curves (Eurodollar ...
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232 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 ...
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198 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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118 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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288 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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268 views

Can we rewrite the pnl of a continuous hedge option as the time average of the volatility weighted by the square gamma?

From what I understand of El Karoui BS Robustness Formula, we can write the PnL of a continuously hedged option as the time average of the volatility weighted by the square gamma, is that right? $$PnL ...
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213 views

eurodollar future

I just found out about eurdollar futures and I am confused. A eurodollar future contract is defined as a cash settled future based on a Eurodollar Time Deposit having a principal value of USD $1,000,...
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112 views

Hedging equities portfolios with vol products

Quote Hedging with variance is not comparable to puts Due to the lack of convexity of a variance swap hedge, we believe it is best to compare long variance hedges to hedging with futures rather than ...
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323 views

How to hedge two currency positions

Having two spot currency positions, short EUR/USD long GBP/USD We are looking for a way to diminish the risk of the spread going against us. The basic idea is ...
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196 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 ...
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1k views

Implementation of an option tail-hedging strategy

This question directly refers to the paper "Capital Asset Pricing Mistakes: The Consistent Opportunities in Tail Hedged Equities", http://www.universa.net/Universa_SpitznagelResearch_201501.pdf. Very ...
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173 views

A simple question on Delta hedging

In the Black and Scholes model, when it is needed to immunize the portfolio from variations in the stock the argument given is the following. If $\alpha_t$ is the amount of invested in the stock, $\...
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161 views

Opposite of Tail-Risk Hedge (Established Vocabulary)

I'm working on a client memo explaining several approaches to equity hedging, and I'm looking for a not-too-technical term for a hedging strategy where I try to keep options near the money, as to have ...
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241 views

Is it better to hedge or reduce the position size? [closed]

Traders hedge to reduce their risk. However, wouldn't reducing the position achieve the same results while keeping the risk management process simpler? At least, one need not worry about making the ...
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87 views

VIX vs S&P: Drift in the hedging residual?

I am looking at the daily returns of the VIX index (dVIX ) and the daily returns of the S&P 500 (dS). I am running a linear regression (using 0 intercept) and get a regression slope of -1.4, i.e. ...

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