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
1
vote
2answers
236 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 : ...
1
vote
1answer
124 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 ...
1
vote
3answers
314 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)]...
1
vote
1answer
281 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 ...
1
vote
1answer
220 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,...
1
vote
1answer
113 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 ...
1
vote
2answers
339 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 ...
1
vote
1answer
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 ...
1
vote
1answer
188 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, $\...
1
vote
2answers
187 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 ...
1
vote
1answer
258 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 ...
1
vote
1answer
64 views

Strategic Asset Allocation and Multi-Asset Class Option Based Tail Risk Hedging

If a Strategic Asset Allocation is defined as an asset allocation to weather all investment environments and one which should be employed in the absence of any market views, it would appear that the ...
1
vote
1answer
83 views

Hedging an Inverse Product

We have two different products that follow the same price $S(t)$ for all time $t$. The payout for product one is given by $w_1(\frac{100}{S(t)} - \frac{100}{S(t + \Delta t)})$ and the payout for ...
1
vote
1answer
108 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. ...
1
vote
1answer
73 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 ...
1
vote
1answer
59 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 ...
1
vote
1answer
73 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 $...
1
vote
2answers
121 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%...
1
vote
1answer
133 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 ...
1
vote
1answer
110 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 ...
1
vote
1answer
82 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 ...
1
vote
1answer
463 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 ...
1
vote
1answer
387 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|...
1
vote
2answers
99 views

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, ...
1
vote
1answer
139 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 ...
1
vote
1answer
1k views

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 ...
1
vote
1answer
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 ...
1
vote
1answer
54 views

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 ...
1
vote
1answer
259 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 ...
1
vote
2answers
117 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 ...
1
vote
1answer
340 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 ...
1
vote
1answer
74 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. ...
1
vote
1answer
270 views

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 (...
1
vote
1answer
67 views

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 $...
1
vote
1answer
98 views

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
1
vote
0answers
34 views

Hedging or Relative Value Strategies with Rho or Tau Correlations?

I understand that the Pearson correlation indicates the strength of linear relationship between two data sets. The applicability of this to hedging strategies is intuitive: If I can establish a linear ...
1
vote
0answers
52 views

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 ...
1
vote
0answers
47 views

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 ...
1
vote
0answers
82 views

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 ...
1
vote
0answers
59 views

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 ...
1
vote
0answers
52 views

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 ...
1
vote
0answers
106 views

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 ...
1
vote
0answers
379 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 ...
1
vote
0answers
54 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, ...
1
vote
1answer
102 views

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 $...
1
vote
0answers
56 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 ...
1
vote
0answers
150 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 ...
1
vote
0answers
35 views

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 ...
1
vote
0answers
242 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 ...
1
vote
1answer
72 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 ...

1
3 4
5
6 7