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Questions tagged [optimal-hedge-ratio]

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How does delta adjustment relate to skew stickiness ratio (SSR)?

The correct delta hedging of a derivative $V$ in a model where volatility $\sigma$ is a function of the underlier $S$ requires a stock holding of an amount $$ \frac{dV}{dS}=\frac{\partial V}{\partial ...
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Minimum variance hedge ratio for currency hedging

The textbook formula for minimum variance hedge ratio (MVHR) is correl (Y,X) * (STDEV Y / STDEV X) However, I would like to reconcile the textbook formula with the ...
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How to construct a delta-neutral portfolio containing stocks using correlations?

I’m aware of the mean-variance framework where we construct a portfolio such that we attempt to minimise the variance and maximise returns. What if instead we’re in a scenario where the main goal is ...
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Calculate minimum variance hedge ratio for foreign-denominated asset hedged to domestic currency

The formula for minimum variance hedge ratio (MVHR) is conceptually the correlation multiplied by the ratios of volatilities. correl (Y,X) * (STDEV Y / STDEV X) ...
sjedi's user avatar
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2 answers
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mathematical proof of the hedge ratio formula for bond futures

We know that the hedge ratio ϕ_F that we should use in order to to the duration-hedging through bond futures is: $$ϕ_F= -(DV01_B / DV01_{CTD} )\cdot CF_{CTD}$$ Where $\textrm{DV01}_B$ is the dollar ...
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How to hedge 3 Month SOFR futures with 1 Month SOFR futures considering FOMC meeting

Has anyone considered trading SR3 vs SR1 SOFR futures? They both have the same underlying basis of daily SOFR, and how would one calculate a hedge ratio for the SR1 to trade along SR3? Looking at the ...
Borla312's user avatar
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Hedge for some exotic options

It is well known that a european call option with strike price $C(K)=(S_T-k)^+$ coul be hedge using the Black-Scholes formula $BS(t,T,r,K,S_0)$. I would like to find a hedge (or sub-hedge) of the the ...
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Calculating the Minimum Variance Hedge Ratio [closed]

Taken from the book: $\Delta{S}$ - Change in spot price, S, during a period of hedge. $\Delta{F}$ - Change in futures price, F, during a period of hedge. If we assume that the relationship between $\...
Vanconts's user avatar
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Have more complex MVA-style models become obsolete?

Just reading a book about about portfolio optimisation. You hear left and right that MVA (Mean Variance Analysis of Markowitz) is out of date, creates suboptimal portfolios in practice and so on ...
not_sure95's user avatar
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Simple beta hedging questions

This might sound really naive but I am really confused by this beta hedging idea. So it seems the standard way to do it is to run a simple OLS on returns (say asset A and B only 2 assets in the ...
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Optimal Hedging Ratio using Copula Models

Let $r_{s, t}$ and $r_{f, t}$ be the return rates of the spot and futures of a commodity at time $t$. The hedging ratio based on variance minimization is calculated by finding the minimum of the ...
Blg Khalil's user avatar
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Pairs trading using dynamic hedge ratio - how to tell if stationarity of spread is due to genuine cointegration or shifting of hedge ratio?

I'm very new to pairs trading, and am trying it out on a few dozen pairs. It seems very natural to me to use a dynamic hedge ratio, as it seems likely that the ratio will move over time. To accomplish ...
Vladimir Belik's user avatar
-2 votes
1 answer
58 views

Hedge 3 securities against 3 other securities

I have a portfolio of 6 securities, 3 long 3 short. I need to hedge them against each other so directional exposure = 0. How would I decide how to weight each security? Is there a model to do this?
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Pairs trading/Cointegration confusion

I've been trying to wrap my head around cointegration. Currently I use the log returns of both stocks A and B, calculate the spread given by: $S = log(A) - n*log(B)$ where $n$ is the Hedge Ratio ...
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Cross hedge: Which commodity to hedge when you have to hedge the jet fuel price but you have option between two commodities

If we have an option between two commodities to hedge jet fuel and the commodities have results as follows: minimum variance hedge ratio: 1.07 for commodity 1 and 2.53 for commodity 2 ...
Jai Suneja's user avatar
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693 views

Constructing a Beta Neutral Hedge in a Pairs Strategy

Looking for resources / explanation. Creating a dollar neutral hedge is easy - stockprice-a/stockprice-b How do I create a beta neutral hedge? I find discussions but no explicit derivation ...
Windstorm1981's user avatar
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Minimum variance hedge ratio price difference vs. log-returns

So from my understanding Hull (2012) f.e. shows that the optimal hedge ratio minimizes the variance of the returns. But what happens to the variance of the prices? Is the Minimum variance hedge ...
macro123's user avatar
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1 answer
103 views

Minimum Variance Hedge Ratio and Risk Capital Relation

So I understand that the minimum variance hedge ratio minimizes the second moment of the portfolios. My question is how is it related to the size of the risk capital (which is calculated as the Value ...
macro123's user avatar
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1 answer
130 views

Hedge ratio with future contract [closed]

I want to buy some stocks and short future contract instead. I wonder whether I can calculate the hedge ratio?
Dat Tran's user avatar
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Hedge Ratio Calculation

My question is if I have a spot position of a commodity e.g Naturals Gas I want to hedge, how would I determine, which futures e.g. quarterly, yearly I should pick. Should I just take the one it is ...
macro123's user avatar
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1 answer
1k 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 ...
ratesandslates's user avatar
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Rolling Hedge Performance

So I have Time Series data for Gas Spot and Futures Prices (first 6 front quarters and first 3 front years) from 2009-2019 and I want to evaluate the performance of a 3- year static hedge vs. 3- year ...
macro123's user avatar
1 vote
1 answer
184 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 ...
Question Anxiety's user avatar
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Translating Order books accounting for fees

I am trying to understand how fee structure plays into how I should best execute a trade. Say there are two exchanges with the following order book: Exchange A: Bid Qty | Bid Price | Ask Price | ...
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single period security market with two assets

Consider a single period security market with two assets. Assume the current prices are There are two states at time one and the payoff matrix is 1.Suppose the investor believes that each state has ...
love clear's user avatar
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Calculate the conditional variance-covariance matrix to optimal hedge ratio bekk [duplicate]

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 ...
Everton Toledo's user avatar
2 votes
1 answer
196 views

Units of measurement for Minimum Variance Hedge Ratio

The minimum variance hedge ratio is given by $h=p*\frac{\sigma_S}{\sigma_F}$. I was wondering if you wanted to calculate the S.D yourself and the spot prices were in Dollars per barrel while futures ...
ConnieTraveller's user avatar
1 vote
1 answer
188 views

Hedge ratio: hedging a portfolio of global equities with futures

A bank decides to use $100 million of its capital to launch an investment strategy (seed money). The portfolio which is launched is made of global equities (say ~ 500 equities of different markets). ...
tweedi's user avatar
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0 answers
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Pair trading: Hege ratio by price ratio or by regression on the stocks

So I feel things like this question do exist on the site however I failed to form a conclusion based on what was written, so I decided to formulate my query as exactly as possible and hopefully anyone ...
East's user avatar
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5 votes
1 answer
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How to tail a hedge? (Question 3.26 from Hull, edition 10)

I am new to finance so I apologize if my question is really basic (which it probably is). If this is not the right "stackexchange" group for this, kindly refer me to the right one. Let's say you own ...
Ted's user avatar
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2 answers
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Two questions regarding cross-hedge

A company has to hold an underlying asset for one year and it is looking to use Brent Crude futures to hedge against changes in the underlying asset's price. Assuming there is no liquidity concerns ...
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2 votes
2 answers
1k views

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 ...
user793468's user avatar
3 votes
0 answers
262 views

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 ...
meh's user avatar
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1 vote
1 answer
704 views

How can I use PCA to determine spread ratios for multiple legs?

I would like to generalize Paul Teetor's A Better Hedge Ratio, which uses prcomp() to determine a ratio between two legs. I am hoping to extend this to multiple legs, but am having trouble finding ...
Stu's user avatar
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