Posts Tagged ‘hedging

11
Oct
11

Finanzas 101: Proxy Hedging

Tal vez es una serie de post más para finanzas 301, pero los ultimos 3 post de Quantivity hacen un buen capitulo de Hedging.

Proxy / Cross Hedging

“The root challenge of two current equity risk and alpha projects boil down to hedging using non-underlying instruments, known as proxy hedging or cross hedging.”

Empirical Quantiles and Proxy Selection

“(…)how to choose an appropriate hedge instrument, especially amongst several alternatives.”

Empirical Copulas and Hedge Basis Risk

“Of particular interest is understanding the dynamics of basis risk under extreme scenarios (both up and down), which are driven by time-varying stochastic joint covariation.”

28
Mar
11

Paper: Hedging dinamico, análisis empírico

An Empirical Analysis of Dynamic Multiscale Hedging using Wavelet Decomposition

Abstract

This paper investigates the hedging effectiveness of a dynamic moving window OLS hedging model, formed using wavelet decomposed time-series. The wavelet transform is applied to calculate the appropriate dynamic minimum-variance hedge ratio for various hedging horizons for a number of assets. The effectiveness of the dynamic multiscale hedging strategy is then tested, both in- and out-of-sample, using standard variance reduction and expanded to include a downside risk metric, the time horizon dependent Value-at-Risk. Measured using variance reduction, the effectiveness converges to one at longer scales, while a measure of VaR reduction indicates a portion of residual risk remains at all scales. Analysis of the hedge portfolio distributions indicate that this unhedged tail risk is related to excess portfolio kurtosis found at all scales.

Link al Paper

26
Oct
10

Paper: Estrategias de cobertura y procesos Lévy

Hedging Strategies and Minimal Variance Portfolios for European and Exotic Options in a Levy Market

Abstract

This paper presents hedging strategies for European and exotic options in a Lévy market. By applying Taylor’s theorem, dynamic hedging portfolios are constructed under different market assumptions, such as the existence of power jump assets or moment swaps. In the case of European options or baskets of European options, static hedging is implemented. It is shown that perfect hedging can be achieved. Delta and gamma hedging strategies are extended to higher moment hedging by investing in other traded derivatives depending on the same underlying asset. This development is of practical importance as such other derivatives might be readily available. Moment swaps or power jump assets are not typically liquidly traded. It is shown how minimal variance portfolios can be used to hedge the higher order terms in a Taylor expansion of the pricing function, investing only in a risk-free bank account, the underlying asset, and potentially variance swaps. The numerical algorithms and performance of the hedging strategies are presented, showing the practical utility of the derived results.

Link al Paper

13
Oct
10

una buena pregunta sobre hedging

Condor Options –siguiendo con la serie de estrategias de hedging (orientada a un VIX Porfolio Hedging, principalmente Futuros de VIX y de Mini VIX)- plantea en su reciente post una excelente pregunta:

When evaluating any hedging strategy, therefore, it is essential to ask: how would the strategy perform in a crisis-free world?

En otras palabras, cuanto te cuesta la estrategia en los periodos donde -a pesar de que Roubini te dice que todo es Crash– todavia no paso nada.

30
Sep
10

critica al hedging convencional

Condor Options tiene un post donde explica los problemas del hedging clasico, tomando como ejemplos a la diversificación y al seguro de portfolio (put y collars).

Portfolio insurance strategies were developed in the late 1970s and early 1980s to provide institutional investors with a guaranteed return and reduced uncertainty, and coincided with the creation of options exchanges. See Bouyé 2009 for an overview of the history and types of portfolio insurance. I’ve tested three such strategies here:

  1. Long ATM 1-year puts: Given a starting $500,000 portfolio allocated to the SPDR S&P 500 ETF (SPY), buy at-the-money (ATM) put options expiring in one year and hold through expiration. Rebalance the SPY shares after expiration to account for any realized gains or losses, and re-hedge.
  2. Long 10% OTM puts: Given a starting $500,000 portfolio allocated to the SPDR S&P 500 ETF (SPY), buy 3-month put options with a strike price 10% below the current SPY price and hold through expiration. Rebalance the SPY shares after expiration to account for any realized gains or losses, and re-hedge.
  3. Zero-cost collars: Given a starting $500,000 portfolio allocated to the SPDR S&P 500 ETF (SPY), buy 3-month zero-cost collars with a long put strike price 10% below the current SPY price and a short call strike price set at the highest level that brings in sufficient credit to offset the price of the put. Hold through expiration. Rebalance the SPY shares after expiration to account for any realized gains or losses, and re-hedge.

07
Apr
10

Paper: Retail y Opciones

Retail Clientele and Option Returns

Abstract:
Does investor clientele matter for option returns? This paper empirically shows that a higher retail trading proportion (RTP) is related to lower delta-hedged option returns. The phenomenon is more pronounced before earnings announcements and among stocks with more time-varying and positively skewed volatility. The results are robust to a number of fundamental factors. Furthermore, a self-fi nancing investment strategy involving options on low and high RTP stocks generates positive abnormal returns. The results suggest that retail investors speculate and pay a lottery premium on the expected future volatility, resulting in more expensive options in terms of higher implied volatilities. This systematic deviation of option-implied volatility from realized volatility suggests retail clientele as a behavioral-based driving force of volatility risk premium.

Link al Paper




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