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4 votes
Accepted

Brownian motion Price and Hedge problem

Step 1: Know your distribution Since $\int_0^t W_s\mathrm{d}s\sim N\left(0,\frac{1}{3}t^3\right)$, we have \begin{align*} S_t &= S_0 \exp\left( rt-\frac{1}{6}\sigma^2 t^3 + \sigma \int_0^t W_s\...
Kevin's user avatar
  • 16k
4 votes

Credit Valuation adjustment (CVA) Hedges

To continue from uness' answer (edit: just seen the OP was very old, but will leave here anyway!) . The greeks will be every element of market risk to which the the CVA is sensitive. Writing in words ...
Mehness's user avatar
  • 533
4 votes

Credit Valuation adjustment (CVA) Hedges

CVA is a price. Just like any price, you compute its sensitivities (greeks) and then use financial products to bring them as close to zero as possible. It's not possible to derive a hedging strategy ...
byouness's user avatar
  • 2,230
4 votes

Gamma and Gamma Hedge

I'm no special expert on options and their Greeks. However, I have had a decade plus experience of almost-daily discussions with a bank derivatives desk, on pin risk and the behaviour of autocallable, ...
demully's user avatar
  • 5,071
3 votes

Pricing of autocallable structured product

Short answer: Do not use BS for AC Long answer: There are plenty of question here about this already. Typically it is priced via Monte Carlo but that is not a model, just an implementation of some ...
AKdemy's user avatar
  • 9,024
3 votes

Hedging with interest rate derivatives

I will work through a detailed example. I hope it helps. Suppose for simplicity that you are trying to hedge the interest rate risk of one simplistic debt instrument. Suppose that the obligor owes ...
Dimitri Vulis's user avatar
3 votes
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Calculating PCA hedge ratio for 3-leg spread

Let's use the following returns matrix, X ...
Chris Taylor's user avatar
  • 5,931
3 votes
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SX5E option hedge

This is just like any other option. For example, if you are trading an IBM option, you hedge with IBM stock, which doesn't expire at all, (obviously). You then sell your hedge in the gamma-storm ...
JoshK's user avatar
  • 2,633
3 votes

How to get the weights for a beta neutral portfolio?

The author did not define what optimal means, therefore I assume here that we want to find portfolio that has $\beta=0$ and has minimum variance $\sigma^2_{\pi}$ for the expected return $\mu_{\pi}$. ...
emot's user avatar
  • 876
3 votes

How do banks hedge their FX TARF trades?

Import TARFS are to first order a strip of up and out calls (with the barrier at the strike + target profit) funded by selling a strip of up and out puts (with the same barrier). So if you have a ...
river_rat's user avatar
  • 1,080
2 votes
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What is the difference between Cost of Currency Hedging and the Price of a Currency Pair Forward?

The concept of covered interest rate parity (CIP) dictates that the forward price should equal the spot price multiplied by the ratio between domestic and foreign interest rates: $\ F = S*(1+i_d)/(1+...
MGL's user avatar
  • 516
2 votes
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Effects of hedges on counterparty exposure used for RWA computation

So, basically, the answer is no. For capital requirements Basel has three categories: a) Counterparty Credit Risk b) Market Risk c) Operation Risk All RWA calculations are additive. If your hedge ...
Attack68's user avatar
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2 votes
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Why is the yield return preferred to the price return for selecting hedges for bonds?

I would put the answer a bit differently: In the end you care about the price, don't you? If you sell the bond then it is bad if you can sell it for less. No matter what the yield is. E.g. if you ...
Richi Wa's user avatar
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2 votes

Why is the yield return preferred to the price return for selecting hedges for bonds?

If the aim of the hedge is to make the portfolio insensitive (as much as possible) to small movements in the yield, then the question that needs answering is the following: If the yield of the ...
byouness's user avatar
  • 2,230
2 votes

Bond portfolio hedging against currency risk

This is a resource you may want to look at. https://personal.vanguard.com/pdf/ISGHC.pdf Additionally, this books seems good for this particular topic: Risk Without Reward: The Case for Strategic ...
Chris Andy's user avatar
2 votes

Where can I find a current tail risk indicator?

St. Louis Fed Financial Stress Index - https://fred.stlouisfed.org/series/STLFSI2 There are others (e.g. from the sellside) but this is publicly available. EDIT: looks like some of the sellside ...
user42108's user avatar
  • 2,272
2 votes

Structured Trade / Hedge consistency

I'll try to give some views on this, I hope it helps bringing some closure to your question. You seem to relate consensus to "theoretical prices". I think this is a bit misleading. I view ...
Daneel Olivaw's user avatar
2 votes

Pros and Cons of SPY hedging strategies

re 1 and 2: You might want to Google something like 'volatility decay' or 'volatility drag' for leveraged ETFs. re 3: a quick look at http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/...
user42108's user avatar
  • 2,272
2 votes
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Meaning of Rebalancing the Gamma in Options?

Achieving gamma neutrality refers to your whole portfolio situation. If you have a portfolio $P$ made up of $n_S$ shares of stock $S$, and of $n_1$, $n_2$ option calls $C_1$, $C_2$ on $S$ (options 1 ...
Giogre's user avatar
  • 366
2 votes

Where can I find a current tail risk indicator?

Bollerslev and Todorov have a paper on this: Tails, Fears, and Risk Premia, Jrl of Finance, (December 2011), pages 2165-2211 (link) . If you have option data, you can simply apply their method. Very ...
Stéphane's user avatar
  • 2,486
2 votes
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Hedging exchange rate risk from ADR with FX Forwards

The P&L of an ADR/GDR comes from the changes in the underlying equity price denominated in local currency, and from the changes in the currency exchange rate. You net by currency the FX delta of ...
Dimitri Vulis's user avatar
2 votes

Uncorrelation between SP500 and USDJPY?

The very definition of uncorrelated is that the two asset class return is not really related, at least by the correlation measure. It means they can independently go south together An old saying goes,...
Preston Lui's user avatar
2 votes

Quantifying Costs/Benefits Of Partial Hedging

One approach I would take is to plot %hedging v/s PnL variance. A perfect hedge should leak no PnL, and a naked position would have variance of the spot. So you have a downward, convex curve that ...
Arshdeep's user avatar
  • 2,451
2 votes
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How do banks hedge their FX TARF trades?

Hedging works similar to any other derivative. That said, there exist a lot of variations (Pivot, Chooser, Dual / Triple currency, conditional, knock-in, ...) and pricing is quite intricate and ...
AKdemy's user avatar
  • 9,024
1 vote
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Where can I find a current tail risk indicator?

Twitter feed of Taleb is a decent predictor. Other than that, most of the stuff that you find is proprietary and somewhat subjective/vague. Here is a paper that proposes VVIX index as a tail risk ...
AK88's user avatar
  • 1,850
1 vote

IFRS9 hedge accounting - fx risk hedge with Cross currency swap with notional reset

If we work through this practically, a hypothetical derivative under IFRS9 cash flow hedge should be representative of the underlying, henceforth the MTM CCS must be mark to market on the currency ...
Attack68's user avatar
  • 10.8k
1 vote

Minimum Variance Hedge Ratio and Risk Capital Relation

Without a risk free investment, the efficient frontier is described by a hyperbola, as you have already suggested. Efficient Frontier: Tour de force Given asset covariance matrix $\Sigma$ and the ...
Kermittfrog's user avatar
  • 6,822
1 vote
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Price adjustment of Black-Scholes delta and gamma for a quanto option

Note that \begin{align*} Call_{\rm BTC}=\frac{1}{S}Call_{\rm USD}. \end{align*} The premium adjusted delta $Delta_{PA}$ is defined as the change of $Call_{\rm BTC}$ with respect to the change of the ...
Gordon's user avatar
  • 21.2k
1 vote

Hedge performance in times of volatility: Beta changes impacting PnL during market rebound

Most of the literature in Finance assumes continuous hedging which is just practically impossible. Minimum variance hedge ratio assumes the same. Unless you’re a bank or HF that can cost effectively ...
Dhruv Mahajan's user avatar

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