Questions tagged [optimal-hedge-ratio]

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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 ...
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0answers
210 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 ...
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2answers
943 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 ...
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0answers
60 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
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1answer
61 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 ...
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1answer
37 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 ...
1
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1answer
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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2answers
310 views

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 ...
1
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1answer
574 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 ...
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0answers
40 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 ...
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1answer
43 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?
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0answers
18 views

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 ...
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0answers
48 views

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 ...
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0answers
64 views

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 ...
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1answer
117 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). ...
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1answer
59 views

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 ...
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1answer
56 views

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 ...
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1answer
74 views

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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0answers
17 views

Variance minimization vs. Value at risk

When computing Minimum Variance Hedge Ratios as explained f.e. in Hull (2012) the goal is to select a hedge ratio such that the variance of the portfolio is minimized. My question is now what are the ...
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0answers
15 views

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 ...
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0answers
9 views

Risk Capital and Minimum Variance Hedge Ratio

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 at ...
0
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0answers
11 views

Engle-Granger Regression for returns or prices?

Im trying to find a cointegration relationship between a spot and futures series as I'd like to compute the optimal hedge ratios. As I find the spot and futures at the price level to be nonstationary, ...
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0answers
29 views

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 ...