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12

The majority of the movement in currencies is in the spot rates, rather than in the term structure. A 3-month rolling hedge would always be protecting against movements in the spot rates, no matter when they happen. Using your example, if the current EUR/USD rate is 1.3333, you might be able to get a 3-month forward at 1.3339. (Forgive me if I have the ...


6

The integration is over a full differential, meaning we can write: $$ \int_{t_i}^T df(t) = f(T) - f(t_i)$$ Now, $V^i$ and $V^a$ represent the 'implied' and 'actual' value of the option, meaning they are time-dependent. This gives: $$e^{r\cdot t_0} \int_{t_0}^T d\left(e^{-r\cdot t}(V^i - V^a)\right) = e^{-r(T-t_0)} (V^i(T) - V^a(T)) - (V^i(t_i) - V^a(t_i))$...


4

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 for celerity: A CVA is a credit linked option on the underlying instrument. You are sensitive to the credit default- (specifically the swap obligation payment ...


4

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 just by looking at the CVA figure, it's like asking what the hedging strategy of a product is if its price is USD 1M... You need the CVA greeks. The ...


4

An Investment Bank earns a profit by selling you an option at a slightly higher price than the theoretical price, or buying it back from you at a slightly lower price. They call this "earning a spread". Then they hedge the option, so as not to make any [further] gains or losses on it (other than the risk free rate). Another way they could earn a profit is ...


3

Let's use the following returns matrix, X 2Y 5Y 10Y -------------------------- 0.0143 0.0910 0.1451 0.1791 0.3505 0.4588 0.0572 0.1358 0.0120 0.0357 0.1809 0.2884 -0.0571 -0.1096 -0.0719 0.0286 0.0710 0.1319 0.0429 0.1806 0.2754 -0.0357 -0.0579 -0.1075 0.0714 0.2513 0.4304 -0.0214 -0....


2

The differences essentially boil down to liquidity and pricing discrepancies between the underlying and the futures of the underlying. With futures you have to consider basis risk which you obviously do not face if you can trade in the underlying directly. Additionally, you need to roll futures contracts before they expire, hence you are faced with roll ...


2

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 FX Hedging. Also, take a look at Advanced Bond Portfolio Management: Best Practices in Modeling and Strategies edited by Frank J. Fabozzi, Lionel Martellini, ...


2

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 have assets in a mutual fund then investors enter and leave the fund and you probably have to sell and buy assets (and there are more clever ways of cash ...


2

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 hedge moves by $x$, by how much did the yield of the bond move? The answer is given by the correlation between yield movements between bond and hedging instrument, ...


2

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: $\ F = S*(1+i_d)/(1+i_f) \\$ In practice CIP means that the outcome of buying an FX forward should be equal to borrowing money in domestic currency (at the domestic interest rate),...


1

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 is with the same counterparty then it likely offsets a) and b) and possibly c). If your hedge is only a market hedge then it will only offset b) and possibly ...


1

Take the weighted average tenor of your book. Weights being the notional of the non usd leg. That is very roughly your duration, which gives you your risk ! Ps i assume all the trades are on the same currency pair


1

This presentation from Citi might help a bit regarding CVA hedging. If you scroll through you will find some examples which show their hedge structures (sic. suggestions). https://www.boj.or.jp/announcements/release_2010/data/fsc1006a5.pdf Me


1

Intuitively, this is the "coupon effect" at work – when the yield curve is upward sloping, lower coupon bonds have higher yield and their yields move up more when the overall curve shifts up (all else equal). The opposite is true when the yield curve is downward sloping. We'll focus on when the curve is upward sloping below. I think it's probably best to ...


1

So after much calculations, this is the approach: In 1 year you need €1,000,000, how much do you need currently ($x$)? If the euro interest rate is at 6%, $$ x\ \times\ (1+6\%) = x(1.06) = €\ 1,000,000$$ $$ \begin{align}x\ = \frac{€\ 1,000,000}{1.06} \newline \therefore\ x\ = €\ 943,396.22\end{align}$$ With the current spot rate, we can convert € 943,...


1

Ito's lemma gives $$dF = \left(\frac{\partial F}{\partial t}+\frac{1}{2}\frac{\partial^2F}{\partial S^2}\sigma^2 S^2\right)dt + \frac{\partial F}{\partial S}dS = adt + bdS $$ Using the usual rules, e.g. $dz^2 = dt$, we get $$ dS^2 = \sigma^2S^2dt,$$ $$dF^2 = b^2dS^2 = b^2\sigma^2S^2dt,$$ and $$dSdF = bdS^2 = b \sigma^2S^2dt,$$ so this gives $$dP^2 = dS^2 +...


1

What you call additional basis risk is unpredictable. It may win or lose in rolling strategy against buying 1 year futures once. But what is measurable is bid/offer spread. In 1 y contract it might be significantly wider that in quarter futures, even considering that you sell 4 times and buy 3 (lose 7 half spreads).


1

A perfectly hedged portfolio should not make any profits different from the risk free interest rate. However, you won't be able to hedge perfectly in the real world. Delta hedging for example requires continous trading and adjusting (this is one way to derive the black -scholes formula: thex hedge the stock perfectly and therefore obtain a risk -free rate ...


1

"However, this way I have a -P cash flow at time 0." - yes, and this is one of the ways to hedge a forward. There is no free lunch - you are cutting risks and paying the price of a put for it. Hedging is a process of limiting your risks, and you certainly can't guarantee a positive overall cashflow, but you do guarantee you won't loose more than P. By ...


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