4 votes

Optimal Hedging Ratio using Copula Models

Using a static copula model implies $\rho_{s,f,t}\equiv\rho_{s,f}$. In such case fitting a copula model to obtain $\rho_{s,f}$ is an overkill, since it can be estimated very simply by the empirical ...
Richard Hardy's user avatar
3 votes

How to tail a hedge? (Question 3.26 from Hull, edition 10)

Bellow is how I learned to do this problem in graduate school (d) What is the optimal number of futures contracts with tailing of the hedge? Optimal Contracts = (Dollar Value of position being ...
Croghan's user avatar
  • 31
3 votes

Cross hedge: Which commodity to hedge when you have to hedge the jet fuel price but you have option between two commodities

The objective of hedging is to reduce the variance of the (position+hedge) portfolio. So which of these two solutions gives a smaller variance? You could calculate it numerically and compare the ...
nbbo2's user avatar
  • 11.3k
2 votes

Hedge Ratio Calculation

You are referring to the position to be hedged, as "spot position", which in gas markets means next day delivery. Hedging this with a longer-dated futured contract does not make sense, since the ...
ZRH's user avatar
  • 1,671
2 votes

mathematical proof of the hedge ratio formula for bond futures

You want to be a little careful with respect to what your sensitivities (DV01s) are measuring here and with respect to what settlement time. Let, $$ DV01_B^t = \text{risk sensitivity of price of bond, ...
Attack68's user avatar
  • 10.2k
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
  • 1,047
1 vote

Calculating the Minimum Variance Hedge Ratio

Hedging is when you are long one thing and short another thing, with the hope that the overall portfolio will be stable, it will not change much in value. Here the hedge position is: long 1 unit of S ...
nbbo2's user avatar
  • 11.3k
1 vote

Pairs trading using dynamic hedge ratio - how to tell if stationarity of spread is due to genuine cointegration or shifting of hedge ratio?

You are right. If the window is small enough every spread looks stationary. What you need is that the spread is steady enough. The mathematical property which implies that pairs-trading works is ...
Sebastian's user avatar
  • 156
1 vote

Hedge 3 securities against 3 other securities

The keyword here is directional exposure. You first need to define what is the instrument that you do not want to have directional exposure to. Oftenwise in case of equities, this might be an equity ...
MGL's user avatar
  • 516
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
  • 6,553
1 vote

Two questions regarding cross-hedge

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 ...
plkn's user avatar
  • 121
1 vote

Bond Hedging: PCA and regression based hedge ratios

There's an old Salomon paper called "Principles of Principal Components: A Fresh Look at Risk, Hedging and Relative Value" which might answer your questions. You can find it online by ...
user42108's user avatar
  • 2,252
1 vote

Measuring Hedge Effectiveness

If you regress spots and futures prices you are likely to end up with a case of spurious correlations. Perhaps a cointegration analysis would be a better tool. This is because the time series may not ...
Ivan's user avatar
  • 1,386
1 vote

Translating Order books accounting for fees

When fees are not symmetric, to take fees into account on orderbook needs to know if you want to provide or consume liquidity: you have in fact two different views (ie two ranking) on the same ...
lehalle's user avatar
  • 12.1k
1 vote

Units of measurement for Minimum Variance Hedge Ratio

Since SD in this case is usually the 1-day difference of log prices (i.e. 1-day returns) and corr is a dimensionless number, you shouldn't have to keep the units the same. After all that's how you're ...
ogukku's user avatar
  • 29

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