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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70 views

Hedging with forward contract

I am wondering what strategies that can be used in hedging with forward contracts in commodities market. I only need to buy the forward contract (long position), let's say a one month contract. So my ...
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52 views

Measuring Hedge Effectiveness

So I was trying to estimate the performance of a static hedge vs dynamic hedge in the electricity market and I came up with some weird findings. When I used the minimum variance hedge approach using ...
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70 views

Can a delta hedge be negative for all values at one time, and positive for all values at another time?

I have a problem that states there was a formula for the hedge $\delta(t, S_t)$ for a contingent claim whose value depends on only the stock value when $T=20$. In this hedge, $\delta(t, S_t)<0$ at $...
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107 views

What is the cheaper IR hedge: Futures or IRS?

Let's take the following idea: Your objective is to hedge interest rate risk. You decide between Futures and IRS: You can sell bund futures (10Y bond equivalent): Price 177.70 Theoretical coupon: 6%...
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105 views

Delta hedging: theoretical value vs actual price

One way to derive the Black-Scholes PDE is via the Delta-hedging argument: Suppose that $V_t = V(t, S_t)$, for some function $V: [0,T] \times \mathbb{R} \to \mathbb{R}$. We construct a portfolio by ...
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97 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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75 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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325 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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What is the optimum hedge ratio when trying to hedge one underlying security with another which is similar in natural?

The question is specified as hedging exposure to oil prices using forward contracts on oil) My idea is that we can just purchase one forward contract for each asset,then it should be perfectly hedged, ...
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136 views

What is the best trading simulation platform for futures, swaps, options, etc.?

I've just started studying derivatives from the "Options, futures, and other derivatives - J.C. Hull" and I'd like to see how to do hedging and trading transactions through a simulation platform or a ...
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How to “Standard Beta Hedge”?

Let's say I have 2 time-series, how would I "standard beta hedge" them against each other? For example, what if the position in 1 timeseries is 100 shares at 16 USD per share. Another time-series is ...
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87 views

Futures hedging for FX

What is the risk that occurs if an investor hedges a short OTC foreign exchange forward sale with a long exchange traded foreign exchange futures with different maturities. And how can the residual ...
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book of options hedging case of floating rate

i'm an intern in bank at Morocco that sells vanilla options on EUR/USD , EUR/MAD , USD/MAD , it s using delta hedging strategy to cover they're position . But because of the switch to floating ...
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223 views

Delta Hedge, does large stock move produce a loss?

I dont understand how MM protect themselves from large moves in underlying while being delta hedged. Example: MM sels 1 ATM put and sells 100stock (delta = 1) as a hedge. Now what will happen if next ...
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106 views

EUR issuance using forwards to hedge FX risk

Trying to think about the right way to hedge a EUR denominated issuance from FX risk only. Say I have an annual pay 20-year EUR bond and I want to hedge the FX risk but take the interest rate risk. I ...
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316 views

Effect of different maturity options in delta-gamma-hedging

I read about hedging with options and think i got it. However there is a case am not sure how to handle. Is there any exception in the delta-gamma-hedging-(calculaton-)technique? - say: solve an set ...
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73 views

How to effectively hedge a Fixed-Term deal in a foreign currency?

Assume my firm is based in USD and agrees with some counterparty to buy, at time $T$, some quantity $Q$ of asset $A$ for a fixed price $K$. Assume also that $A$ prices and $K$ are denominated in EUR. ...
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Hedging behind the decomposition of american put options

Now I'm reading a paper:"alternative characterizations of american put options" , the authors are Carr,Jarrow,Myneni http://www.math.nyu.edu/research/carrp/papers/pdf/amerput7.pdf After theorem 1 (...
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Hedging using relative values

Consider I have two stocks $A$ and $B$, $A$ is trading at $\$40$ and $B$ at $\$30$. The standard deviation of its returns are $\sigma_A=25\%$ and $\sigma_B = 30\%$. Correlation between the returns is $...
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Can you hedge a derivative with a CASH|spot product or does it have to be another derivative instrument

Consider you have a SWAP (any kind) to hedge this SWAP, you will most likely use another Derivative,but can you use a cash|spot product to hedge this. Like Cash Equity or FX Spot
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Hedge robustness of the one factor Hull White model

I recently came across a quote in a book: "All single factor models share the limitation that shifts in curve levels cause shifts in the package of vanilla options that are a good hedge for the ...
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Do barrier options have closed form values for Greeks?

This may be quite simple but I was wondering if barrier options, and more particularly up-and-out European call options have closed form values for the Greeks?
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Interest rate hedging using treasury futures – timing and duration

I'm pondering over the following (rather standard) problem: We have \$10 million invested in government bonds and are concerned with highly volatile interest rate over the next six months. We want to ...
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Vega hedging swaption with caplets - precisely, what will go wrong?

I am trying to form a kind of unified perspective of how (vega) hedging an exotic with vanillas, or hedging a 'basket option' with vanillas will go wrong. So in particular, I want to be able to ...
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Tailing the Hedge for Minimum Variance Hedge Ratio (Hull, 10ed)

I am an amateur reading Hull's Options, Futures and other Derivatives. I have encountered an issue similar to the one here: How to tail a hedge? (Question 3.26 from Hull, edition 10). The author ...
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Dupire Vomma and Stochastic volatility

Suppose that you are short an option on asset $X_t$ following a pure diffusion. Suppose you are hedging your position using (Dupire) Local volatility model. Suppose that the option is concave with ...
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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 ...
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How do FX brokers decide to hedge or book a customer's trades?

FX brokers try to be more profitable by, - booking(b-book) the traders that are predicted to be losing money according to the trader profile or trading history. so, if the customer loses money, the ...
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245 views

Hedging the duration and convexity of a bond portfolio

I'm trying to work through this homework question, but not sure how to approach it. You recently took over as the manager of a bond portfolio. Your total assets under management – all consisting of ...
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53 views

Why does the price of a butterfly spread increase are rate exponential [closed]

I know that stock prices are assumed to be Stochastic processes that follow Geometric brownian motion. The expectation of stock prices at time T given stock price at time 0 is: $e^{-rT}S_0$. However, ...
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Hedging a long position-one period from Steven Shreve Stochastic Calculus for Finance

The following question is taken from Steven Shreve Volume 1, Chapter 1, Exercise $1.6$ (Hedging a long position-one period) Consider a one period binomial stock model with $S_0=4$, $S_1(H)=8$ and $...
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51 views

Simple 3 way delta hedge

Consider 3 futures contracts: A BTC/ETH, settled in BTC B USD/ETH, settled in ETH C USD/BTC, settled in BTC As the markets aren't efficient, sometimes these ...
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110 views

Optimal Hedging of Options - asymmetry between long and short vol positions

Going over Zakamouline's Approximation method for optimal delta hedging of options, it is claimed that the result remains valid for both buying options (long vol positions) or selling options (short ...
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Hedging Strategies involving Forwards and Options [closed]

"An investor or business with long exposure to an asset can hedge exposure by either entering into a short futures contract or by buying a put option. An investor or business with a short exposure to ...
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181 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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68 views

Framework for hedging fx and utilizing correlation between asset returns

Can anyone point me in a direction (research paper, books, ..) which developes a framework/strategy for hedging currency exposure for an international bond portfolio? This paper finds optimal ...
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53 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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64 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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48 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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87 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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Pricing and hedging OTC vanilla options

Most OTC option textbooks are about exotic options. I'm curious how sell-side price and hedge OTC vanilla options e.g. European option. What models do they use? How to forecast volatility (using GARCH?...
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How to delta-one hedge a IRD sensitivity on an intra-day basis (using eg, FX or bond futures)?

I'm looking to hedge an interest rate differential sensitivity (the output from a statistical model of spot FX rates) on an intraday frequency. What is the best way to do it? Important factors ...
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160 views

Research topic on volatility

Currently studying about volatility, VIX and implied volatility as well as option pricing via stochastic volatility models. My question is how these are used in real life except of speculation. Do ...
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56 views

Minimum Lower Partial Moment (n=2) hedging ratio

I would like to better have understanding on the minimum-LPM hedging. I have understood that the co-LPM matrix cannot be modeled by GARCH type models that are used to estimate to the covariance matrix,...
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47 views

What strategies benefit from EURO (ECB) interest rate hike(s) long term? [closed]

I would like to know which strategies would perform well if the ECB hikes interest rates? Alternatively, what is a good strategy to hedge a loan in EUR against interest rate hikes?
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288 views

The difference between hedging and replicationg methods of deriving option prices

For deriving, say European, option prices, is there a difference between the replication approach and the hedging approach? More specifically, is there a situation where the hedging approach will not ...
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154 views

Currency/Forex Hedging using Momemtum Strategy

Mainly the two ways I could find on currency hedging are using forwards (to lock in a future exchange rate) and options. However, I'm curious whether currency can be hedged via some commonly known ...
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364 views

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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Delta hedging of tax option

So corporate profits are taxed as a percentage of the positive earning, but losses will not generate any taxes. Hence taxation have a clear option structure where the government has a call option on ...

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