Quantitative Finance Stack Exchange
Quantitative Finance Stack Exchange

Questions tagged [hedging]

Financial strategy used to offset potential monetary losses or volatility.

435 questions
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Cost function for hedging portfolio

Let's say I am hedging an exotic instrument $E$ with $N$ liquid instruments $L_i$, each of which has an associated hedging ratio $R_i$ and a bid-ask spread $\delta_i$ (per dollar of notional). What would you recommend as a cost function to balance…
quant_dev
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How to gamma hedge and vega hedge an autocallable product?

I am pretty new in quantitative finance, and I am interested by the hedging of autocalls. Could you, please explain which financial products should be traded (specify the way, please) to delta hedge, gamma hedge and vega hedge an autocall? And why…
user11798649
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Dynamic hedging strategy example

I am faced with the following problem. Let the standard Brownian motion $W_t$ be the price process of a traded asset in an economy with zero interest rate. Define $$A_T=\frac{1}{T}\int_0^T W_t^2 dt$$ I have two questions: What is the fair price at…
Bravo
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Securitization of a loan portfolio

I am interested in the securitazion process and am looking for useful examples to help me understand how it can be applied in practice. Assuming I have a loan portfolio consisting of secured* and unsecured loans. The loans are further assigned a…
Homunculus Reticulli
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How would you hedge this structure?

I have a contingent claim and I want to find out what is the best structure to meet the continent claim, how to price it and how to hedge it. I am looking more for a qualitative answer. Suppose I want to best replicate this claim $H$: Given a stock…
inquisitive
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Taylor series expansion and hedging

I'm reading Options, Futures and other derivatives of Hull, ed.8. In the appendix to chapter 18, author uses Taylor series expansion to find the relationship between portfolio's price change and change of time and price of underlying. Then, he…
siwy9
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Hedging, Delta, Gamma, Vega

I sometimes find it difficult to see, how to hedge a portfolio. Let say, that I created a product consisting of an Asian call (strike 1), Vanilla call (strike 2), and an Asian Put (strike 1) on a stock called ABC. Now let say the the delta of the…
Vinter
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Hedging cross gamma

I understand how to hedge delta and gamma risk. Could someone explain to me how cross gamma hedging is done by the trading desk. In particular I am interested in hedging for interest rate exotics. So lets just take cross gamma of rates and vols.
ywong
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What is the correct hedging strategy using futures?

In practice, even without maturity and underlying mismatch, hedging using futures does not always require a one-to-one hedge ratio. Tailing factor needs to be considered. Suppose the current spot price is $3. With 50 percent of the probability, the…
Sahab
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Is it better to hedge or reduce the position size?

Traders hedge to reduce their risk. However, wouldn't reducing the position achieve the same results while keeping the risk management process simpler? At least, one need not worry about making the wrong hedging calculations. What are the pros and…
curious
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To hedge, why not simply buy puts that expire on the same date as your calls?

This r/options comment avouches that on Sept 24 2020 Someone bought 40,000 [T]esla puts. The strike price is 40 dollars so the puts will only pay out if Tesla is below \$40. The expiration date is October 2nd so that is the last day they can have…
user31928
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Hedging an Inverse Product

We have two different products that follow the same price $S(t)$ for all time $t$. The payout for product one is given by $w_1(\frac{100}{S(t)} - \frac{100}{S(t + \Delta t)})$ and the payout for product two is $w_2(S(t + \Delta t) - S(t))$. Where…
arb0101
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Opposite of Tail-Risk Hedge (Established Vocabulary)

I'm working on a client memo explaining several approaches to equity hedging, and I'm looking for a not-too-technical term for a hedging strategy where I try to keep options near the money, as to have a quickly reacting hedge, expensive, but…
zuiqo
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How were very large short volatility positions hedged?

This question came from an actual trade occurred in about 2014 when PIMCO sold very large positions in SPX 1840 put/1920 call strangle. It was reported the premium alone was worth \$100 million (they opened another similar but smaller strangle…
user70540
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Do products exist to hedge against specific building materials?

I was wondering whether there exist product to hedge against specific building materials? Up to now I have not yet found a suitable product to hedge against cement or glass? If not, how would one hedge against the price increases of these products?…
Snowflake
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