How to hedge callability?

Odusseus · June 1st, 2007, 11:05 am

E.g. in PDRC's, range accruals etc.

PaperCut · June 3rd, 2007, 12:39 pm

QuoteOriginally posted by: OdusseusE.g. in PDRC's, range accruals etc.To what is the callability sensitive?

Odusseus · June 4th, 2007, 9:25 am

For PRDC's, exchange rate mostly; for cancellable swaps, interest rate but also vol level. So out of the money options could do. But I was wondering whether they was anything else.

bsycheng · June 4th, 2007, 2:06 pm

Don't think there is a direct way to hedge it....Generally reduces the greeks, as when the trade is called => Greeks are 0 (i.e increase p(call) => fall in greeks of callable structure).It makes your Ddelv (change in vol for change in underlying sens), or whatever you want to call it, profile a lot more aggressive as a byproduct. Expected duration of trade will be lower (harder to manage, if you can't hedge the greeks and this changes => lose money)Let me know if you have a more specific question

Odusseus · June 7th, 2007, 9:32 am

Change in vol for change in underlying sens: what do you mean exactly? Apologies for the potentially naive question.

bsycheng · June 7th, 2007, 10:09 am

My bad:Change in Vega for change in Spot level

Odusseus · June 28th, 2007, 2:13 pm

Thank you. But if the greeks go to zero, is there such a bad need to hedge?