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5 votes
Accepted

P&L when hedging with realized volatility

Without diving too much into the paper, the derivations can be verified as follows. Derivation: Let us start from the end result: Using the product rule with respect to $t$ on $e^{-rt} \left(V_I(t) - ...
Pleb's user avatar
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4 votes
Accepted

Relationship between options open interest and spot price movement

I think what you describe makes sense, at least loosely. This paper finds evidence of a mechanism that seems quite similar to what you describe. They write: "The potential mechanism is that ...
fes's user avatar
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4 votes

Purpose of Vega Hedging

Doing away with jargon for a bit, it is wise to hedge every risk factor present in your portfolio. Implied vol is one of them, just like the spot.
Arshdeep's user avatar
  • 2,451
4 votes
Accepted

Hedging gamma, theta or other risks

In the Black-Scholes model Gamma and theta do not need to be hedged because the BS PDE says that they balance each other (I'll take $r = 0$): $$ \frac{\partial f}{\partial t} + \frac12 \sigma^2 S^2\...
Frido's user avatar
  • 1,906
3 votes

Is price really the cost of hedging?

Let’s make the scenario even more extreme to make the point clear: assume that the 1yr implied vol is $\sigma$, and that zero vol is expected for the next 6 months. Also assume interest rates are ...
dm63's user avatar
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3 votes

Relationship between options open interest and spot price movement

This presentation by Robert Almgren cite most of the literature on this topic: Option Hedging with Market Impact. Olivier Guéant and Jiang Pu worked on the same topic (hedging taken market impact into ...
lehalle's user avatar
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2 votes

How to price, hedge ESG-dependent products?

These kind of swaps are not hedged. They usually are priced incorp with the ESG linked Loans or Bonds. These types of Swaps usually have bonus and malus. IF the ESG rating is hit the loans are a ...
TJB's user avatar
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2 votes

Relationship between options open interest and spot price movement

Empirically yes, it absolutely does, this paper from squeezemetrics started doing the rounds in 2020, though was released in 2017: https://squeezemetrics.com/monitor/download/pdf/white_paper.pdf Note ...
Newquant's user avatar
  • 804
2 votes

ETF Market Making Hedging

Market makers can and do try to make money by deciding how and when to buy / sell the underlyings, unless they are specifically prevented from having that agency by having some sort of stated ...
ThatDataGuy's user avatar
2 votes

Portfolio Optimization with ETFs and Futures

I did the same experiment using yahoo finance to get charts. I took the SPY, the VIX and third ETF for comparison. First have a look at the volatility of the 3 vehicles: You can see that the VIX has ...
lehalle's user avatar
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2 votes

WN 30Yr UST Futures Conversion Factor vs Delivery Ratio

Due to the existence of the conversion factor the futures price does not move 1:1 with the bond, so a position in a notional 1mm bonds and a notional 1mm futures will gain or lose PnL as market yields ...
Attack68's user avatar
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2 votes

Do we need a risk premium for the assets in the binomial option pricing model?

Stock is hedgeable by the stock itself, options don't even enter the picture. The point is that if you have anything ( a factor, stock, or anything) whose mean you can stay exposed to (1/n) while ...
Arshdeep's user avatar
  • 2,451
2 votes

Static and Dynamic Hedging of Vol/Var Swaps

Not sure if still relevant for the OP, but as I lack modesty I'd like to say that it is possible, to a good approximation, to hedge varswaps dynamically using 3 delta-hedged options only. This is ...
Frido's user avatar
  • 1,906
2 votes

Long Bond & Interest Rate Futures Hedge - is it carry negative?

The position you describe is a long basis position--Long Bond, Short Future. Carry is the difference between Coupon and Financing. $$Carry = Coupon - Financing$$ As you mentioned, the yield is less ...
AlRacoon's user avatar
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2 votes

Option: link between Vega and Gamma

This is simple. If you are far away from maturity, your option price will more sensitive to volatility on your underlying, effective change on your underlying price won't have any significative impact....
JohnGalt's user avatar
2 votes

Option: link between Vega and Gamma

$Vega*(Vol1-Vol2)=C(t,S(t),vol1)-C(t,S(t),vol2)$ (1=2) where vol1 and vol2 are close enough for 1 and 2 to be the same. Now we delta hedge both calls at implied volatility. We ignore that change in ...
Arshdeep's user avatar
  • 2,451
1 vote
Accepted

Option: link between Vega and Gamma

When you hedge an option's delta at implied volatility, the resulting PnL over timestep, dt, is: $$ PnL = (\Delta_i * dS + \frac{\Gamma_i dS^2}{2} + \Theta * dt) - \Delta_i * dS $$ Leaving: $$ \frac{\...
Newquant's user avatar
  • 804
1 vote

Option: link between Vega and Gamma

I have another answer. We know by the link, the call valued at the incorrect vol (beta) loses gamma PnL. We know the call valued rightly loses no PnL (all strategies are fair in the risk neutral world)...
Arshdeep's user avatar
  • 2,451
1 vote
Accepted

How an invesment bank make money with structured notes?

When the issuer bank sells to its client a note expressing some view, the bank is on the other side of the client's bet. But this is not the view most banks want, so generally they will try to hedge ...
Dimitri Vulis's user avatar
1 vote

Are these two hedging strategies equivalent?

TLDR The two strategies are essentially the same within a discounting tolerance, assuming all have the same nominals. Practically, you will acheive very similar delta exposure. Although technically ...
Attack68's user avatar
  • 10.7k
1 vote

Can you hedge against a short squeeze with call options?

Yes one could hedge a short position from getting squeezed by buying a call. This is equivalent to being long a naked put. This is preferred over the "stop buy order" if you want to be ...
AlRacoon's user avatar
  • 6,632
1 vote

Calculate minimum variance hedge ratio for foreign-denominated asset hedged to domestic currency

From what I understand about your problem, you are a EUR investor looking to hedge the downside risk of USD depreciating against EUR such that returns earned in a USD ETF are worth less in your ...
KaiSqDist's user avatar
  • 1,409
1 vote

Any other ways to hedge a bond portfolio against interest rate risk?

If you are long a bond and want to hedge it: Sell the same bond. Sell another bond. Sell a bond future. Pay a swap. Buy a payer swaption. Those are some basic methods. Ofcourse there are many ...
user68819's user avatar
  • 505
1 vote

How do we hedge option vega practically?

Just adding my 2 cents. The skill of the role is to collect bid offer on average. Therefore, there will most definitely be times where your positions carry you out and you are forced to lose some or ...
user68819's user avatar
  • 505
1 vote

Purpose of Vega Hedging

No, changes in implied volatility do not affect the PnL at maturity because at maturity his option positions collapse to the terminal payoff [s-k]+, and his futures positions will settle. Vega is only ...
Newquant's user avatar
  • 804
1 vote

What is your exposure when you sell a binary option

Let’s say you short a 1 month binary call struck at usd100 with a payoff of usd1. Let’s say the current stock price is usd80. Then your exposure is simply that if the stock gaps upwards to above 100 ...
dm63's user avatar
  • 17.2k
1 vote
Accepted

Dynamic Hedging

Imagine that you had an option position that you decided you were only going to hedge once, at creation, then let run until maturity. As the market moves and as time passes (and as IV changes), your ...
Newquant's user avatar
  • 804
1 vote

ETF Market Making Hedging

In addition to @ThatDataGuy reply, that MM decide which positions and when to hedge, another point in ETF market making is the following: For hedging positions on large baskets (as indexes) the best ...
KT8's user avatar
  • 855
1 vote

Purpose of Vega Hedging

It depends on the strategy. The position seller suffers a lot from vega. He can try to balance the portfolio but it unbalances the delta gamma hedge. It also depends on the time until maturity. If you ...
Gilberto's user avatar
1 vote

How do energy companies measure the magnitude of the risks of buying energy at a variable price and selling it at a fixed price?

While this question has been posed well before the European energy crisis, it is interesting to comment with the benefit of hindsight. Breaking down the answer into two parts: 1) Retailers with no ...
ZRH's user avatar
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