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mj
Posts: 3449
Joined: December 20th, 2001, 12:32 pm

What is hedging?

March 26th, 2003, 7:41 am

let me clarify:buying one unit of stock to hedge a call option is a model-independent superhedge.MJ
 
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fire
Posts: 254
Joined: July 10th, 2003, 10:11 pm

What is hedging?

April 29th, 2004, 3:28 am

MJ: how can one call buying a stock for a call hedging? I mean, if the price of the underlying decrease then we lose both the value of the call as well as the asset differential.
 
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DrEvil
Posts: 36
Joined: April 22nd, 2004, 10:17 pm

What is hedging?

April 29th, 2004, 1:05 pm

I've heard two definitions of a 'Texas Hedge':1.) It loses money whether the underlying goes up or down (basically refuses to admit a residual volatility exposure).2.) The hedge is approximate, and tries to keep P&L within a band of acceptable error across a range of scenarios.
 
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RFMontraz
Posts: 246
Joined: December 4th, 2002, 8:55 am

What is hedging?

June 2nd, 2004, 11:55 am

QuoteOriginally posted by: fireMJ: how can one call buying a stock for a call hedging? I mean, if the price of the underlying decrease then we lose both the value of the call as well as the asset differential.Err.. I think he meant a short call option dude
 
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exotiq
Posts: 1888
Joined: October 13th, 2003, 3:45 pm

What is hedging?

July 12th, 2004, 8:54 pm

Another angle on hedging: the taking of a position to eliminate a dimension of risk. For example, a delta hedge eliminates the exposure of the option to the dimension of the direction of the underlying price move, but not to the size of the underlying price move (gamma/convexity/instantaneous vol exposure), to changes in interest rates, or to changes in the raw market price of the option (implied volatility or vega risk).The single dimension approach is also the case with parameterised models; if you model your yield curve with a Vasicek model, and then take a single bond position to cancel out your exposure to the sigma in the model, that is an example of a parameterized interest rate volatility hedge.This definition differentiates hedging from replication (cancelling out all risk factors at once) and P&L minimization techniques.
 
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fashionmarina
Posts: 97
Joined: December 17th, 2005, 9:47 am

What is hedging?

January 1st, 2006, 8:52 am

hican anyone explain me simply what i should do if i need to hedge a long position in a vanilla call option if i use a Lévy process model (VG,NIG...)?if i've understand the control of delta (and gamma?) hedge only the diffusion part of risk while because (with Lèvy processes) markets are incomplete i need to hedge the jump risk too.to do that if i've understand i should to do vega-hedging with every strike out-of-the-money or anything of similar.can anyone explain me the theory of hedging with lèvy processes and what i should to do to implement it.what are authors/papers about it?it's very important for me, thanks.
 
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kirthisumanth
Posts: 3
Joined: January 31st, 2006, 3:57 pm

What is hedging?

February 1st, 2006, 1:13 pm

does anybody have the paper on hedge risk analysis.
 
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nikadani
Posts: 2
Joined: July 28th, 2006, 11:04 am

What is hedging?

September 8th, 2006, 9:40 am

To me (I am a trader) hedging is a meaningless word unless it is followed by "Of what?". Because as a corporate or as a trader we are trying to avoid some events ( like the event of going bankrupt, possibility of a blow up , avoiding to get fired) and hedging is a way to ensure that . If hedging is like what is being described in text books ( a series of payoff which is exactly opposite to the payoff obtained from an initial transaction), then all traders will become redundant because traders are being paid for taking risk and if they hedge (in the so called text book way), no body'll hire them . The job of trader is to take the risk (the fat-tailed event from where the profit, money and big bonus comes) and hedging is only to ensure that he is in the game ( and does not die or blow up). So to me first hedging is a verb and not a noun (means it requires an action and is ever changing with the change in the environment). Also all phrases like "delta-hedging", "gamma-hedging" and so on requires to be asked the same followup question "of what". Rest here is how Merriam webster describes hedging (http://www.m-w.com/dictionary/hedging), I think the last one is beautiful HedgeOne entry found for hedge. Main Entry: 2hedgeFunction: verbInflected Form(s): hedged; hedg•ingtransitive verb1 : to enclose or protect with or as if with a hedge : ENCIRCLE2 : to hem in or obstruct with or as if with a barrier : HINDER <hedged about by special regulations and statutes -- Sandi Rosenbloom>3 : to protect oneself from losing or failing by a counterbalancing action <hedge a bet>intransitive verb1 : to plant, form, or trim a hedge2 : to evade the risk of commitment especially by leaving open a way of retreat : TRIM3 : to protect oneself financially: as a : to buy or sell commodity futures as a protection against loss due to price fluctuation b : to minimize the risk of a bet Text
 
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nikadani
Posts: 2
Joined: July 28th, 2006, 11:04 am

What is hedging?

September 8th, 2006, 9:44 am

To me (I am a trader) hedging is a meaningless word unless it is followed by "Of what?". Because as a corporate or as a trader we are trying to avoid some events ( like the event of going bankrupt, possibility of a blow up , avoiding to get fired) and hedging is a way to ensure that . If hedging is like what is being described in text books ( a series of payoff which is exactly opposite to the payoff obtained from an initial transaction), then all traders will become redundant because traders are being paid for taking risk and if they hedge (in the so called text book way), no body'll hire them . The job of trader is to take the risk (the fat-tailed event from where the profit, money and big bonus comes) and hedging is only to ensure that he is in the game ( and does not die or blow up). So to me first hedging is a verb and not a noun (means it requires an action and is ever changing with the change in the environment). Also all phrases like "delta-hedging", "gamma-hedging" and so on requires to be asked the same followup question "of what". Rest here is how Merriam webster describes hedging (http://www.m-w.com/dictionary/hedging), I think the last one is beautiful HedgeOne entry found for hedge. Main Entry: 2hedgeFunction: verbInflected Form(s): hedged; hedg•ingtransitive verb1 : to enclose or protect with or as if with a hedge : ENCIRCLE2 : to hem in or obstruct with or as if with a barrier : HINDER <hedged about by special regulations and statutes -- Sandi Rosenbloom>3 : to protect oneself from losing or failing by a counterbalancing action <hedge a bet>intransitive verb1 : to plant, form, or trim a hedge2 : to evade the risk of commitment especially by leaving open a way of retreat : TRIM3 : to protect oneself financially: as a : to buy or sell commodity futures as a protection against loss due to price fluctuation b : to minimize the risk of a bet Text
 
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GeneralDude
Posts: 86
Joined: August 26th, 2006, 11:44 pm

What is hedging?

September 28th, 2006, 10:48 pm

Hedging is so general. Could it not even charactarize something as simple as option spreading (both vertical and horizontal)?
 
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nsawilmott
Posts: 27
Joined: February 6th, 2006, 1:04 pm

What is hedging?

October 10th, 2006, 5:56 pm

QuoteOriginally posted by: fireMJ: how can one call buying a stock for a call hedging? I mean, if the price of the underlying decrease then we lose both the value of the call as well as the asset differential.QuoteOriginally posted by: mjlet me clarify:buying one unit of stock to hedge a call option is a model-independent superhedge.MJPlease forgive my misunderstanding. How can one hedge a call option by buying the stock? Doesn't it already have limited loss while making money in price increase.
 
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gentinex
Posts: 143
Joined: June 8th, 2006, 1:16 pm

What is hedging?

October 11th, 2006, 3:45 pm

QuoteOriginally posted by: nsawilmottQuoteOriginally posted by: fireMJ: how can one call buying a stock for a call hedging? I mean, if the price of the underlying decrease then we lose both the value of the call as well as the asset differential.QuoteOriginally posted by: mjlet me clarify:buying one unit of stock to hedge a call option is a model-independent superhedge.MJPlease forgive my misunderstanding. How can one hedge a call option by buying the stock? Doesn't it already have limited loss while making money in price increase.This was already explained below---see RFMontraz's response. When you SELL a call option, buying the stock is a hedge.
 
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flairplay
Posts: 130
Joined: September 26th, 2006, 1:34 pm

What is hedging?

October 12th, 2006, 6:51 pm

A profit reduction technique to satisfy senior management. Makes them believe the little dribbles are being brought in by sales. Of course it's only intra bank arbitrage.It is very rarely known to reduce losses. Therefore hedge funds accept the fait accompli and look to do the opposite - i.e., increase risk.Their standard technique is to look for pennies on the M4. This is because others dont, so there are plenty of pennies lying around. When the inevitable lorry arrives, it's the investor who gets hit.
Last edited by flairplay on October 11th, 2006, 10:00 pm, edited 1 time in total.
 
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Disptra
Posts: 70
Joined: January 20th, 2007, 1:50 am

What is hedging?

March 9th, 2007, 7:17 am

I understand hedging can reduce risks. A simple way to reduce risk is to close some positions and hold more cash. When should hedging be used instead of simply closing out positions?
 
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ennodetmp1
Posts: 3
Joined: April 9th, 2006, 8:30 pm

What is hedging?

June 25th, 2007, 5:32 pm

IMHO, 'hedging' should be explained from 2 different perspectives..buy side and sell SideBuyside perspective - Suppose a fund manager holds 100,000 shares of IBM.He would like to reduce the effect of IBM falling below 90 on him by buying 90 puts.The manager takes a directional bet and adds a cushion below him so that , if at all he falls, pain is reduced.He makes money only if IBM gains value.Sell Side perspective :- A market maker (from whom the fund manager bought those puts) is generally market neutral. He sells a derivative and creates a portfolio of underlying and other traeable assets which would track the value of the derivative that he sold.This creation of portfolio is what is called 'hedging'.A market maker does not make money from directional bets on the market. In the example above, he makes money from bid/ask spreads and from clever pricing of the derivative (using higher vol, higher interest rate etc).If he's clever, he'll make money even if the derivative's underlying gains or looses value.Thus hedging means slightly different things depending on which perspective you look at it.They are similar but not same.
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