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Journal articles on the topic 'Portfolio hedging'

Author: Grafiati

Published: 11 September 2021

Last updated: 12 February 2022

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1

Jiménez-Gómez, Miguel, Natalia Acevedo-Prins, and Miguel David Rojas-López. "Simulation hedge investment portfolios through options portfolio." Indonesian Journal of Electrical Engineering and Computer Science 16, no. 2 (November 1, 2019): 843. http://dx.doi.org/10.11591/ijeecs.v16.i2.pp843-847.

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<p>This paper presents two hedging strategies with financial options to mitigate the market risk associated with the future purchase of investment portfolios that exhibit the same behavior as Colombia's COLCAP stock index. The first strategy consists in the purchase of a Call plain vanilla option and the second strategy in the purchase of a Call option and the sale of a Call option. The second strategy corresponds to a portfolio of options called Bull Call Spread. To determine the benefits of hedging and the best strategy, the Geometric Brownian Motion and Monte Carlo simulation is used. The results show that the two hedging strategies manage to mitigate market risk and the best strategy is the first one despite the fact that the Bull Call Spread strategy is lower cost.</p>

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Meirelles, Sofia Kusiak, and Marcelo Fernandes. "Estratégias de Imunização de Carteiras de Renda Fixa no Brasil." Brazilian Review of Finance 16, no. 2 (July 11, 2018): 179. http://dx.doi.org/10.12660/rbfin.v16n2.2018.69279.

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This paper aims to statistically compare the performance of two hedging strategies for Brazilian fixed income portfolios, with discrete rebalancing. The first hedging strategy matches duration, and hence it considers only small parallel changes in the yield curve. The alternative methodology ponders level, curvature and convexity shifts through a factor model. We first estimate the yield curve using the polynomial model of Nelson & Siegel (1987) and Diebold & Li (2006) and then immunize the fixed income portfolio using Litterman & Scheinkman’s (1991) hedging procedure. The alternative strategy for portfolio immunization outperforms duration matching in the empirical exercise we contemplate. Additionally, we show that rebalancing the hedging portfolio every month is more efficient than at other frequencies.

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3

Machado-Santos, Carlos. "Portfolio insurance using traded options." Revista de Administração Contemporânea 5, no. 3 (December 2001): 187–214. http://dx.doi.org/10.1590/s1415-65552001000300010.

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Literature concerning the institutional use of options indicates that the main purpose of option trading is to provide investors with the opportunity to create return distributions previously unavailable, considering that options provide the means to manipulate portfolio returns. In such a context, this study intends to analyse the returns of insured portfolios generated by hedging strategies on underlying stock portfolios. Because dynamic hedging is too expensive, we have hedged the stock positions discretely, in a way that the positions were revised only when the daily hedge ratio has changed more than a specific amount. The results, provided by these hedging schemes, indicate that a small rise of the standard deviation seems to be largely compensated with the higher average returns. In fact, such strategies seem to be highly influenced by the price movements of underlying stocks, requiring more frequent (sparse) adjustments in periods of high (low) volatility. Thus, discrete hedging strategies seem more accurate and meaningful than the arbitrary regular intervals largely presented and discussed in literature.

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Engle, Robert F., Stefano Giglio, Bryan Kelly, Heebum Lee, and Johannes Stroebel. "Hedging Climate Change News." Review of Financial Studies 33, no. 3 (February 14, 2020): 1184–216. http://dx.doi.org/10.1093/rfs/hhz072.

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Abstract We propose and implement a procedure to dynamically hedge climate change risk. We extract innovations from climate news series that we construct through textual analysis of newspapers. We then use a mimicking portfolio approach to build climate change hedge portfolios. We discipline the exercise by using third-party ESG scores of firms to model their climate risk exposures. We show that this approach yields parsimonious and industry-balanced portfolios that perform well in hedging innovations in climate news both in sample and out of sample. We discuss multiple directions for future research on financial approaches to managing climate risk.

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5

Filipozzi, Fabio, and Kersti Harkmann. "Optimal currency hedge and the carry trade." Review of Accounting and Finance 19, no. 3 (August 24, 2020): 411–27. http://dx.doi.org/10.1108/raf-10-2018-0219.

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Purpose This paper aims to investigate the efficiency of different hedging strategies for an investor holding a portfolio of foreign currency bonds. Design/methodology/approach The simplest strategies of no hedge and fully hedged are compared with the more sophisticated strategies of the ordinary least squares (OLS) approach and the optimal hedge ratios found by the dynamic conditional correlation-generalised autoregressive conditional heteroskedasticity approach. Findings The sophisticated hedging strategies are found to be superior to the simple strategies because they lower the portfolio risk in domestic currency terms and improve the Sharpe ratios for multi-asset portfolios. The analyses also show that both the OLS and dynamic hedging strategies imply holding a limited carry position by being long in high-yielding currencies but short in low-yielding currencies. Originality/value The performance of multi-currency portfolios is examined using more realistic assumptions than in the previous literature, including a weekly frequency and a constraint of no short selling. Furthermore, carry trades are shown to be part of an optimal portfolio.

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6

TSUZUKI, YUKIHIRO. "ON OPTIMAL SUPER-HEDGING AND SUB-HEDGING STRATEGIES." International Journal of Theoretical and Applied Finance 16, no. 06 (September 2013): 1350038. http://dx.doi.org/10.1142/s0219024913500386.

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This paper proposes optimal super-hedging and sub-hedging strategies for a derivative on two underlying assets without any specification of the underlying processes. Moreover, the strategies are free from any model of the dependency between the underlying asset prices. We derive the optimal pricing bounds by finding a joint distribution under which the derivative price is equal to the hedging portfolio's value; the portfolio consists of liquid derivatives on each of the underlying assets. As examples, we obtain new super-hedging and sub-hedging strategies for several exotic options such as quanto options, exchange options, basket options, forward starting options, and knock-out options.

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7

Lee, Jae Ha, and Han Deog Hui. "Hedging Strategies with the KTB Futures." Journal of Derivatives and Quantitative Studies 10, no. 2 (November 30, 2002): 25–56. http://dx.doi.org/10.1108/jdqs-02-2002-b0002.

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This study explores hedging strategies that use the KTB futures to hedge the price risk of the KTB spot portfolio. The study establishes the price sensitivity, risk-minimization, bivariate GARCH (1,1) models as hedging models, and analyzes their hedging performances. The sample period covers from September 29, 1999 to September 18, 2001. Time-matched prices at 11:00 (11:30) of the KTB futures and spot were used in the analysis. The most important findings may be summarized as follows. First, while the average hedge ration of the price sensitivity model is close to one, both the risk-minimization and GARCH model exhibit hedge ratios that are substantially lower than one. Hedge ratios tend to be greater for daily data than for weekly data. Second, for the daily in-sample data, hedging effectiveness is the highest for the GARCH model with time-varying hedge ratios, but the risk-minimization model with constant hedge ratios is not far behind the GARCH model in its hedging performance. In the case of out-of-sample hedging effectiveness, the GARCH model is the best for the KTB spot portfolio, and the risk-minimization model is the best for the corporate bond portfolio. Third, for daily data, the in-sample hedge shows a better performance than the out-of-sample hedge, except for the risk-minimization hedge against the corporate bond portfolio. Fourth, for the weekly in-sample hedges, the price sensitivity model is the worst and the risk-minimization model is the best in hedging the KTB spot portfolio. While the GARCH model is the best against the KTB +corporate bond portfolio, the risk-minimization model is generally as good as the GARCH model. The risk-minimization model performs the best for the weekly out-of-sample data, and the out-of-sample hedges are better than the in-sample hedges. Fifth, while the hedging performance of the risk-minimization model with daily moving window seems somewhat superior to the traditional risk-minimization model when the trading volume increased one year after the inception of the KTB futures, on the average the traditional model is better than the moving-window model. For weekly data, the traditional model exhibits a better performance. Overall, in the Korean bond markets, investors are encouraged to use the simple risk-minimization model to hedge the price risk of the KTB spot and corporate bond portfolios.

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8

Bond, Michael T., and Jack H. Rubens. "Inflation Hedging Through International Equity Investment." Journal of Applied Business Research (JABR) 8, no. 2 (October 18, 2011): 107. http://dx.doi.org/10.19030/jabr.v8i2.6172.

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For years common stock were thought to be an effective inflation hedge. The dismal performance of domestic equities in the 1970s was, thus, completely unanticipated. A possible method for improving stock portfolio performance on a period-by-period basis vs. inflation would be the inclusion of foreign equities. Regression analysis of various foreign equity markets and internationally efficient portfolios vs. measures of actual, expected and unexpected inflation indicated that including non-US equities in portfolios did not protect investors from inflation on a period-by-period basis in the 1970-88 time period.

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9

HARYONO, NADIA ASANDIMITRA, and M. RIADHOS SOLICHIN. "Efektivitas Strategi Hedging Menggunakan Kontrak Indeks Lq45 Futures dalam Meminimalisasi Risiko Sistematis Portofolio." BISMA (Bisnis dan Manajemen) 2, no. 2 (June 6, 2018): 100. http://dx.doi.org/10.26740/bisma.v2n2.p100-106.

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AbstractInvestor can make hedging to the systematic risk or market risk by using LQ45 index futures contract whose value comparable to the share portfolio value they have. This research had the purpose to prove used the LQ45 index futures contract in minimize the portfolio systematic risk. In this research used LQ45 index as the proxy on the portfolio have been properly diversified. Data used in this research were LQ45 index daily value data and the daily closing price of LQ45 index futures with 2004-2005 research period. Testing was conducted by comparing the portfolio return hedged variance to the portfolio return unhedged variance. Calculation of hedging effectiveness used LQ45 index futures contract as much as -9%, negative hedging effectiveness calculation due to the portfolio return hedged variance larger than portfolio return unhedged variance or, in the other words the risk in the futures market was larger than the risk in the spot market. Thus, the LQ45 index futures contract was ineffective to use as the hedging strategy in minimize the portfolio systematic risk

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10

Novotný, Jan. "Portfolio Hedging and Earnings Management." Český finanční a účetní časopis 2014, no. 4 (December 1, 2014): 84–93. http://dx.doi.org/10.18267/j.cfuc.425.

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11

Sorensen, Eric H., Joseph J. Mezrich, and Dilip N. Thadani. "Currency Hedging Through Portfolio Optimization." Journal of Portfolio Management 19, no. 3 (April 30, 1993): 78–85. http://dx.doi.org/10.3905/jpm.1993.409450.

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12

VanderLinden, David, Christine X. Jiang, and Michael Hu. "Conditional Hedging and Portfolio Performance." Financial Analysts Journal 58, no. 4 (July 2002): 72–82. http://dx.doi.org/10.2469/faj.v58.n4.2455.

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13

Massa, Massimo, and Andrei Simonov. "Hedging, Familiarity and Portfolio Choice." Review of Financial Studies 19, no. 2 (2006): 633–85. http://dx.doi.org/10.1093/rfs/hhj013.

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14

Bisin, Alberto, Piero Gottardi, and Adriano A. Rampini. "Managerial Hedging and Portfolio Monitoring." Journal of the European Economic Association 6, no. 1 (March 2008): 158–209. http://dx.doi.org/10.1162/jeea.2008.6.1.158.

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15

Lim, Kian-Guan. "Portfolio hedging and basis risks." Applied Financial Economics 6, no. 6 (December 1996): 543–49. http://dx.doi.org/10.1080/096031096334006.

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16

Bonaparte, Yosef, George M. Korniotis, and Alok Kumar. "Income hedging and portfolio decisions." Journal of Financial Economics 113, no. 2 (August 2014): 300–324. http://dx.doi.org/10.1016/j.jfineco.2014.05.001.

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17

Bueno-Guerrero, Alberto. "Interest rate option hedging portfolios without bank account." Studies in Economics and Finance 37, no. 1 (September 20, 2019): 134–42. http://dx.doi.org/10.1108/sef-02-2019-0058.

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Purpose This paper aims to study the conditions for the hedging portfolio of any contingent claim on bonds to have no bank account part. Design/methodology/approach Hedging and Malliavin calculus techniques recently developed under a stochastic string framework are applied. Findings A necessary and sufficient condition for the hedging portfolio to have no bank account part is found. This condition is applied to a barrier option, and an example of a contingent claim whose hedging portfolio has a bank account part different from zero is provided. Originality/value To the best of the authors’ knowledge, this is the first time that this issue has been addressed in the literature.

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18

DeMaskey, Andrea L. "Single and Multiple Portfolio Cross-Hedging with Currency Futures." Multinational Finance Journal 1, no. 1 (March 1, 1997): 23–46. http://dx.doi.org/10.17578/1-1-2.

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19

Hamdi, Haykel, and Jihed Majdoub. "Risk-sharing finance governance: Islamic vs conventional indexes option pricing." Managerial Finance 44, no. 5 (May 14, 2018): 540–50. http://dx.doi.org/10.1108/mf-05-2017-0199.

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Purpose Risk governance has an important influence on the hedging performances in option pricing and portfolio hedging in both discrete and dynamic case for both conventional and Islamic indexes. The paper aims to discuss these issues. Design/methodology/approach This paper explores option pricing and portfolio hedging in a discrete and dynamic case with transaction costs. Monte Carlo simulations are applied to both conventional and Islamic indexes in US and UK markets. Simulations show that conventional and Islamic assets do not exhibit the same price and portfolio hedging strategy governance. Findings The authors conclude that Islamic assets show different option price and hedging strategy compared to their conventional counterpart. Originality/value The research question of this paper aims at filling the gap in the empirical literature by exploring option price and hedging structure for both conventional and Islamic indexes in US and UK stock markets.

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20

Sinha, Pankaj, Akshay Gupta Akshay Gupta, and Hemant Mudgal Hemant Mudgal. "Active Hedging Greeks of an Options Portfolio integrating churning and minimization of cost of hedging using Quadratic & Linear Programing." Journal of Prediction Markets 4, no. 2 (December 18, 2012): 1–14. http://dx.doi.org/10.5750/jpm.v4i2.474.

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This paper proposes a methodology for active hedgingGreeks of an option portfolio integrating churning and minimization of cost of hedging. In the first section, hedging strategy is implemented by taking positions in other available options, while simultaneously minimizing the net premium paid for the hedging and then churning the portfolio to take into account the changed value of Greeks in the new portfolio. In the second section, the paper extends the model to incorporate the transaction cost while hedging the portfolio and churning it in Indian Scenario. Both constant and nonlinear shape of transaction cost has been considered as per the Security Transaction Tax and Brokerage charges in India. A quadratic programming has been presented which has been approximated by a linear programming solution. The prototype software has been developed in MS Excel using Visual Basic.

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Lee, Kyunghee, Hyuncheul Lim, and Youngsoo Choi. "ELS Hedging Method based on CVaR Using Stocks Portfolio and Futures." Journal of Derivatives and Quantitative Studies 24, no. 3 (August 31, 2016): 423–55. http://dx.doi.org/10.1108/jdqs-03-2016-b0003.

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In this paper, we analyze the hedging risk intrinsic in the auto call step down equity linked securities (ELS) based on two underlying indices including HSCEI, which are major products of the ELS market. And we also propose new hedging strategies based on Conditional Value at Risk (CVaR) using stocks portfolio and futures. Due to the non-symmetric bimodal distribution for return of ELS, which comes from the Knock-In (KI) property inherent in step down ELS structure, and inherent shortfall risk in the ELS structure, a local delta hedging strategy has a limit. In addition, hedging using futures are difficult because of 1) frequent roll-over related with HSCEI futures, 2) price difference between underlying index and futures and 3) lack of futures liquidity caused by excessive ELS issue based on HSCEI. As a way to manage these problems, this paper proposes new hedging strategies : First, construct stocks portfolio tracking index using method suggested by Rockafellar and Uryasev (2002), Alexander, Coleman and Li (2006). Second, do hedging by using this stocks portfolio and futures. This paper shows that 1) index-tracking stocks portfolio based on CVaR has a better performance and lower shortfall risk than index by comparing market ratio, information ratio and Sharpe Ratio, and 2) hedging using stocks portfolio is better than futures. As the policy proposals, if ETF, which tracks the underlying indices of ELS based on CVaR, is to be listed on the exchange (KRX), various kinds of product structures for mid-risk-mid-return structured products will be able to develop further, as well as offer more convenience with hedging.

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Foglia, Matteo, Maria Cristina Recchioni, and Gloria Polinesi. "Smart Beta Allocation and Macroeconomic Variables: The Impact of COVID-19." Risks 9, no. 2 (February 4, 2021): 34. http://dx.doi.org/10.3390/risks9020034.

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Smart beta strategies across economic regimes seek to address inefficiencies created by market-based indices, thereby enhancing portfolio returns above traditional benchmarks. Our goal is to develop a strategy for re-hedging smart beta portfolios that shows the connection between multi-factor strategies and macroeconomic variables. This is done, first, by analyzing finite correlations between the portfolio weights and macroeconomic variables and, more remarkably, by defining an investment tilting variable. The latter is analyzed with a discriminant analysis approach with a twofold application. The first is the selection of the crucial re-hedging thresholds which generate a strong connection between factors and macroeconomic variables. The second is forecasting portfolio dynamics (gain and loss). The capability of forecasting is even more evident in the COVID-19 period. Analysis is carried out on the iShares US exchange traded fund (ETF) market using monthly data in the period December 2013–May 2020, thereby highlighting the impact of COVID-19.

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23

Yu, Mei, Qian Gao, Zijian Liu, Yike Zhou, and Dan Ralescu. "A Study on the Optimal Portfolio Strategies Under Inflation." Journal of Systems Science and Information 3, no. 2 (April 25, 2015): 111–32. http://dx.doi.org/10.1515/jssi-2015-0111.

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AbstractThis paper tests the inflation hedging ability of four categories of important financial assets in China: Commodity futures, real estate, gold and industry stock and select the assets that have significant inflation hedging effect. Then the authors construct the mean-variance model under the inflation factor, using the selected assets to construct the inflation hedging portfolio, solving the model and obtain the optimal investment strategy with inflation protection function. The result shows that the portfolio constructed by the model have more stable real returns and its inflation hedging ability can be even better if the short selling restriction of stocks is eliminated.

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Wang, Xiao-Tian, Zhong-Feng Zhao, and Xiao-Fen Fang. "Option pricing and portfolio hedging under the mixed hedging strategy." Physica A: Statistical Mechanics and its Applications 424 (April 2015): 194–206. http://dx.doi.org/10.1016/j.physa.2015.01.021.

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25

Lapshin, Victor. "A Nonparametric Approach to Bond Portfolio Immunization." Mathematics 7, no. 11 (November 16, 2019): 1121. http://dx.doi.org/10.3390/math7111121.

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We consider the problem of short term immunization of a bond-like obligation with respect to changes in interest rates using a portfolio of bonds. In the case that the zero-coupon yield curve belongs to a fixed low-dimensional manifold, the problem is widely known as parametric immunization. Parametric immunization seeks to make the sensitivities of the hedged portfolio price with respect to all model parameters equal to zero. However, within a popular approach of nonparametric (smoothing spline) term structure estimation, parametric hedging is not applicable right away. We present a nonparametric approach to hedging a bond-like obligation allowing for a general form of the term structure estimator with possible smoothing. We show that our approach yields the standard duration based immunization in the limit when the amount of smoothing goes to infinity. We also recover the industry best practice approach of hedging based on key rate durations as another particular case. The hedging portfolio is straightforward to calculate using only basic linear algebra operations.

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Hamma, Wajdi, Bassem Salhi, Ahmed Ghorbel, and Anis Jarboui. "Conditional dependence structure between oil prices and international stock markets." International Journal of Energy Sector Management 14, no. 2 (July 31, 2019): 439–67. http://dx.doi.org/10.1108/ijesm-04-2019-0010.

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Purpose The purpose of this paper is to analyze the optimal hedging strategy of the oil-stock dependence structure. Design/methodology/approach The methodology consists to model the data over the daily period spanning from January 02, 2002 to May 19, 2016 by a various copula functions to better modeling the dependence between crude oil market and stock markets, and to use dependence coefficients and conditional variance to calculate optimal portfolio weights and optimal hedge ratios, and to suggest the best hedging strategy for oil-stock portfolio. Findings The findings show that the Gumbel copula is the best model for modeling the conditional dependence structure of the oil and stock markets in most cases. They also indicate that the best hedging strategy for oil price by stock market varies considerably over time, but this variation depends on both the index introduced and the model used. However, the conditional copula method with skewed student more effective than the other models to minimize the risk of oil-stock portfolio. Originality/value This research implication can be valuable for portfolio managers and individual investors who seek to make earnings by diversifying their portfolios. The findings of this study provide evidence of the importance of stock assets for making an optimal portfolio consisting of oil in the case of investments in oil and stock markets. This paper attempts to fill the voids in the literature on volatility among oil prices and stock markets in two important areas. First, it uses copulas to investigate the conditional dependence structure of the oil crude and stock markets in the oil exporting and importing countries. Second, it uses the dependence coefficients and conditional variance to calculate dynamic hedge ratios and risk-minimizing optimal portfolio weights for oil–stock.

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Cont, Rama, and Yu Hang Kan. "Dynamic Hedging of Portfolio Credit Derivatives." SIAM Journal on Financial Mathematics 2, no. 1 (January 2011): 112–40. http://dx.doi.org/10.1137/090750937.

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Jaramillo-Restrepo, Juan Andrés, Miguel Jiménez-Gómez, and Natalia Acevedo-Prins. "Stock portfolio hedging with financial options." Indonesian Journal of Electrical Engineering and Computer Science 19, no. 3 (September 1, 2020): 1436. http://dx.doi.org/10.11591/ijeecs.v19.i3.pp1436-1443.

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<span lang="EN-US">The financial market currently offers derivative products whose characteristics allow investors to reduce the negative impact of natural market fluctuations on the value of their assets. Hedging with financial options is one of the possible strategies that an investor can implement in order to reduce the exposure or risk of their investments. This paper aims to assess the real impact of financial options as a hedging instrument on an investment portfolio made up of variable income assets of the Colombian market. The results show that for options with an upward trend, call options allow future losses to be hedged; on the other hand, for bearish trends, coverage is made with put options.</span>

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Hsieh, Chang-Tesh, Iskandar S. Hamwi, and Tim Hudson. "An inflation-hedging portfolio selection model." International Advances in Economic Research 8, no. 1 (February 2002): 20–34. http://dx.doi.org/10.1007/bf02295560.

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Singh, Amanjot, and Manjit Singh. "A revisit to stock market contagion and portfolio hedging strategies." International Journal of Law and Management 59, no. 5 (September 11, 2017): 618–35. http://dx.doi.org/10.1108/ijlma-03-2016-0026.

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Purpose This paper aims to attempt to re-capture the stock market contagion effect from the US to the BRIC equity markets during the recent global financial crisis in a multivariate framework. Apart from this, the study also identifies optimal portfolio hedging strategies to minimize the underlying portfolio risk during the period undertaken for the purpose of study. Design/methodology/approach To account for the dynamic interactions, the study uses vector autoregression (p) dynamic conditional correlation (DCC)-asymmetric generalized autoregressive conditional heteroskedastic (1,1) model in a multivariate framework, coupled with a monthly heat map relating to the co-movement between the US and the BRIC equity markets during the period 2007-2009. Finally, by following the studies, Hammoudeh et al. (2010) and Syriopoulos et al. (2015), the time-varying optimal portfolio hedge ratios and weights are computed. Findings The results report a contagion impact of the US subprime crisis (following the collapse of the Lehman Brothers) on the Indian and Russian stock markets only. On the other hand, a higher degree of interdependence between the US and Brazilian market has been observed. The US and Chinese equity markets indicate a relatively lower level of interdependence among themselves. The optimal hedge ratios are found to be most effective for a portfolio comprising the US and Chinese stocks even during the crisis period. A US investor should invest approximately 30 cents in the Indian market and rest of the 70 cents in the US market in a US$1 portfolio to minimize the portfolio risk without lowering the expected returns. During the crisis period (2007-2009), the optimal portfolio weights indicate a higher weightage to the BRIC stocks. Practical implications The results support the construction of optimal US–BRIC stock portfolios and provide an insight to the investors and policy makers both domestic as well as international, with regard to the contagion impact and interdependence, especially during a crisis period. Originality/value The study uses a DCC model in a multivariate framework instead of bivariate, wherein all the markets are factored into a single interaction framework across a very long period (2004-2014). Second, a heat map of monthly correlation combinations has been created for the period 2007-2009, to comprehend the contagion impact or interdependence among the markets. Finally, the study ascertains time-varying optimal hedge ratios and portfolio weights for a two asset portfolio, from a US investor viewpoint, making the study first of its kind in all the perspectives.

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Mun, Gyu Hyeon, and Jeong Hyo Hong. "Risk Management with KOSDAQ50 Index Futures Markets." Journal of Derivatives and Quantitative Studies 11, no. 2 (November 30, 2003): 51–79. http://dx.doi.org/10.1108/jdqs-02-2003-b0003.

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This paper studies hedging strategies that use the KOSDAQ50 index futures to hedge the price risk of the KOSDAQ50 index spot portfolio. This study uses the minimum variance hedge model and bivariate ECT-GARCH (1,1) model as hedging models, and analyzes their hedging performances. The sample period covers from January 31, 2001 to December 31, 2002. The most important findings may be summarized as follows. First, both the risk-minimization and GARCH model exhibit hedge ratios that are substantially lower than one. Hedge ratios of the risk-minimization tend to be higher than those of GARCH model. Second, for the in-sample data, hedging effectiveness of GARCH model is higher than that of the risk-minimization, while for the out-of-sample data, hedging effectiveness of the risk-minimization with constant hedge ratios is not far behind the GARCH model in its hedging performance. Third, the hedging performance of KOSDAQ50 index futures is lower than that of KOSPI200 index futures, but higher than that of KTB futures. In conclusion, in the KOSDAQ50 index market, investors are encouraged to use the simple risk-minimization model to hedge the price risk of KOSDAQ50 spot portfolios.

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32

Fung, Man Chung, Katja Ignatieva, and Michael Sherris. "Managing Systematic Mortality Risk in Life Annuities: An Application of Longevity Derivatives." Risks 7, no. 1 (January 3, 2019): 2. http://dx.doi.org/10.3390/risks7010002.

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This paper assesses the hedge effectiveness of an index-based longevity swap and a longevity cap for a life annuity portfolio. Although longevity swaps are a natural instrument for hedging longevity risk, derivatives with non-linear pay-offs, such as longevity caps, provide more effective downside protection. A tractable stochastic mortality model with age dependent drift and volatility is developed and analytical formulae for prices of longevity derivatives are derived. The model is calibrated using Australian mortality data. The hedging of the life annuity portfolio is comprehensively assessed for a range of assumptions for the longevity risk premium, the term to maturity of the hedging instruments, as well as the size of the underlying annuity portfolio. The results compare the risk management benefits and costs of longevity derivatives with linear and nonlinear payoff structures.

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33

Casucci, Jeff, Price Nimmich, Patrick Stanton, and Philip Swicegood. "Cost-Effective Portfolio Hedging: A Dividend-funded Derivative Approach." International Business & Economics Studies 3, no. 3 (June 18, 2021): p8. http://dx.doi.org/10.22158/ibes.v3n3p8.

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This paper examines the effectiveness of using dividend yield to fund hedging protection for an S&P500 equity portfolio. We construct a hedged portfolio that consists of the S&P500 index but uses the dividend yield to purchase put option protection for hedging risk. We then compare the risk and return of the hedged S&P500 portfolio to that of an unhedged S&P500 portfolio. The trade-off reduced returns compared to the overall risk reduction are also measured. Results indicate that this risk-management strategy could be appealing to a large contingency of investors seeking down-side protection at a modest cost that is self-funded from dividends.

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Yousaf, Imran, Elie Bouri, Shoaib Ali, and Nehme Azoury. "Gold against Asian Stock Markets during the COVID-19 Outbreak." Journal of Risk and Financial Management 14, no. 4 (April 20, 2021): 186. http://dx.doi.org/10.3390/jrfm14040186.

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This study examines the safe-haven and hedging roles of gold against thirteen Asian stock markets during the COVID-19 outbreak. During the COVID-19 sub-period, gold is shown to be a strong hedge (diversifier) for the majority (minority) of Asian stock markets; it exhibits the property of a strong safe-haven in China, Indonesia, Singapore, and Vietnam, and a weak safe-haven in Pakistan and Thailand. The optimal weights of all stock-gold portfolios are lower during the COVID-19 sub-period than the pre COVID-19 sub-period, suggesting that portfolio investors should increase their investment in gold during the COVID-19 sub-period. The hedging effectiveness for most Asian stock markets is higher during the COVID-19 sub-period. Further analyses show that the hedge portfolio returns in many cases are mostly driven by gold implied volatility and inflation expectations in both sub-periods. Our findings have useful implications for market participants holding investments in Asian stocks during stressful periods.

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AURELL, ERIK, and PAOLO MURATORE-GINANNESCHI. "OPTIMAL HEDGING OF DERIVATIVES WITH TRANSACTION COSTS." International Journal of Theoretical and Applied Finance 09, no. 07 (November 2006): 1051–69. http://dx.doi.org/10.1142/s0219024906003901.

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We investigate the optimal strategy over a finite time horizon for a portfolio of stock and bond and a derivative in an multiplicative Markovian market model with transaction costs (friction). The optimization problem is solved by a Hamilton–Jacobi–Bellman equation, which by the verification theorem has well-behaved solutions if certain conditions on a potential are satisfied. In the case at hand, these conditions simply imply arbitrage-free ("Black–Scholes") pricing of the derivative. While pricing is hence not changed by friction allow a portfolio to fluctuate around a delta hedge. In the limit of weak friction, we determine the optimal control to essentially be of two parts: a strong control, which tries to bring the stock-and-derivative portfolio towards a Black–Scholes delta hedge; and a weak control, which moves the portfolio by adding or subtracting a Black–Scholes hedge. For simplicity we assume growth-optimal investment criteria and quadratic friction.

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Borochkin, A. A. "Investment portfolio Forex risk hedging in the international stock market." Finance and Credit 26, no. 3 (March 30, 2020): 644–72. http://dx.doi.org/10.24891/fc.26.3.644.

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Subject. Investment management on the international financial market necessitates a special approach to foreign currency hedging. The majority of international investors fully eliminate risk associated with their foreign-exchange holdings, seeking profits only from stock price differentials. In certain circumstances, a correlation between local currency exchange rate and local stock index may provide additional opportunities for profit generation. Objectives. The aim of the study is to test the hypothesis that partial currency risk-taking may reduce the total portfolio risk and increase return on international investment. Methods. I apply the global optimization approach to calculate investment portfolios for 11 countries of the world. Each portfolio includes shares of 20–25 highly capitalized companies. Descriptive statistic methods are used to check the input data, i.e. random variable calculation, pivot tables. Investment strategy efficiency is assessed based on the Sharpe Ratio, Sortino Ratio, Treynor Ratio and Omega Ratio. Results. Currency hedge position at the rate of about 14 percent of the total portfolio value may increase investment yield by two percentage points annually on the ten-year time span. Conclusions and Relevance. Total currency risk hedge is necessary for investment in developed and developing countries that pursue the policy of regular devaluation of their national currency. Market regulators inside a particular country should take into account that a sudden devaluation of national currency may be needed, if return on the stock market is lower than that of risk-free instruments.

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Saeed, Tareq, Elie Bouri, and Dang Khoa Tran. "Hedging Strategies of Green Assets against Dirty Energy Assets." Energies 13, no. 12 (June 17, 2020): 3141. http://dx.doi.org/10.3390/en13123141.

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Previous studies argue that the relationships between clean/green and dirty energy assets are time-varying, but there is a lack of evidence on the hedging ability of clean energy stocks and green bonds for dirty assets, such as crude oil and an energy stock index exchange traded fund (ETF), and the portfolio implications. Furthermore, potential drivers of the dynamics of the hedge portfolio returns are still unknown. To address these research gaps, the authors provide an extensive analysis of the hedging ability of clean/green assets against two dirty energy assets (crude oil prices and energy ETF) using daily data from 3 January 2012 to 29 November 2019. Using corrected dynamic conditional correlation models, the authors model correlation and then compute hedge ratios and hedging effectiveness, which all seem to vary with time. The results from hedging effectiveness indicate that investors should follow a dynamic hedging strategy and that clean energy stocks are more effective hedge than green bonds, especially for crude oil. The application of regression analyses shows that the implied volatilities of US equities and crude oil as well as US dollar index have a negative impact on the hedge portfolio returns, whereas gold prices and inflation have a positive impact.

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Vries, Esti Van Wyk De, Rangan Gupta, and Reneé Van Eyden. "INTERTEMPORAL PORTFOLIO ALLOCATION AND HEDGING DEMAND: AN APPLICATION TO SOUTH AFRICA." Journal of Business Economics and Management 15, no. 4 (October 1, 2014): 744–75. http://dx.doi.org/10.3846/16111699.2012.688855.

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This paper analyses the intertemporal hedging demand for stocks and bonds in South Africa, the United Kingdom and the United States. The analysis is done using an approximate solution method for the optimal consumption and wealth portfolio problem of an infinitely long-lived investor. Investors are assumed to have Epstein-Zin-Weil-type preferences and face asset returns described by a first-order vector autoregression in returns and state variables. The results show that the mean intertemporal hedging demands for stocks are considerably smaller in SA than in the UK or the US, whilst the mean intertemporal hedging demand for bonds are not significantly different from zero in any of the countries considered. Furthermore, it is found that stocks in the US and the UK do not present a useful hedging opportunity for an investor in SA, nor do SA stocks present a useful hedging opportunity for investors from the UK or the US.

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Ghaemi Asl, Mahdi, and Muhammad Mahdi Rashidi. "Dynamic diversification benefits of Sukuk and conventional bonds for the financial performance of MENA region companies: empirical evidence from COVID-19 pandemic period." Journal of Islamic Accounting and Business Research 12, no. 7 (August 4, 2021): 979–99. http://dx.doi.org/10.1108/jiabr-09-2020-0306.

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Purpose This study aims to investigate the spillover between the Middle East and North Africa (MENA) stock index and several security indices, including Sukuk and conventional bond, and ultimately compare the hedge effectiveness of Sukuk and conventional bond. Design/methodology/approach The study uses VAR (1)-asymmetric Baba, Engle, Kraft and Kroner-multivariate generalized autoregressive conditional heteroskedasticity (1,1) model to analyze the volatility and shock and asymmetric shock spillover between Sukuk index and several bond indices in the MENA region including, Bond, All Bond, High Yield Bond and Bond and Sukuk and MENA stock market index and ultimately compare the hedging capabilities of Sukuk and conventional bonds by calculating the optimal portfolio weights for securities indices and stock portfolios and hedge effectiveness of security indices. Findings Results indicate that there is no shock, volatility and asymmetric shock spillover between the Sukuk index and MENA stock index, implying that Sukuk indices behave independently from MENA stock indices; however, there is shock and asymmetric shock spillover between MENA stock indices and security indices that include conventional bonds. The result of optimal portfolio weights and corresponding hedge effectiveness indicate that Sukuk is the most significant asset among other security indices in diversifying and hedging stock MENA portfolios. Moreover, the hedge effectiveness of Sukuk shows persistent trends during both the normal and crisis periods. Practical implications The study suggests that MENA stock market investors and investment managers should add Sukuk instead of the conventional bond to their portfolio to hedge their portfolio against investment risks during both normal and crisis periods. Originality/value Although many studies compare many aspects of Sukuk and conventional bonds, this is the first study that compares the hedge effectiveness of Sukuk and conventional bond based on the time-varying optimal portfolio weights strategy.

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Jacques, Michel. "On the Hedging Portfolio of Asian Options." ASTIN Bulletin 26, no. 2 (November 1996): 165–83. http://dx.doi.org/10.2143/ast.26.2.563217.

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AbstractWe give 2 explicit formulae for the hedging portfolio of Asian options. One is based on the usual Lognormal approximation, and the other on an Inverse Gaussian approximation. Both give excellent results as replicating strategies when the parameters of the model are in a reasonable range.

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Rosenberg, Michael. "Hedging a Non-Dollar Fixed-Income Portfolio." ICFA Continuing Education Series 1989, no. 5 (January 1989): 33–38. http://dx.doi.org/10.2469/cp.v1989.n5.7.

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Xia, Jianming. "MEAN-VARIANCE PORTFOLIO CHOICE: QUADRATIC PARTIAL HEDGING." Mathematical Finance 15, no. 3 (July 2005): 533–38. http://dx.doi.org/10.1111/j.1467-9965.2005.00231.x.

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Wei, Gang, and Shiping Chen. "Pricing and hedging option under portfolio constrained." Acta Mathematica Scientia 21, no. 4 (October 2001): 483–94. http://dx.doi.org/10.1016/s0252-9602(17)30437-x.

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Barr, G. D. I., C. G. Holdsworth, and B. S. Kantor. "Portfolio strategies for hedging against rand weakness." South African Journal of Accounting Research 21, no. 1 (January 2007): 81–101. http://dx.doi.org/10.1080/10291954.2007.11435127.

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Leroux, Anke D., and Vance L. Martin. "Hedging Supply Risks: An Optimal Water Portfolio." American Journal of Agricultural Economics 98, no. 1 (May 6, 2015): 276–96. http://dx.doi.org/10.1093/ajae/aav014.

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BOUVERET, GÉRALDINE. "PORTFOLIO OPTIMIZATION UNDER A QUANTILE HEDGING CONSTRAINT." International Journal of Theoretical and Applied Finance 21, no. 07 (November 2018): 1850048. http://dx.doi.org/10.1142/s0219024918500486.

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We study a problem of portfolio optimization under a European quantile hedging constraint. More precisely, we consider a class of Markovian optimal stochastic control problems in which two controlled processes must meet a probabilistic shortfall constraint at some terminal date. We denote by [Formula: see text] the corresponding value function. Following the arguments introduced in the literature on stochastic target problems, we convert this problem into a state constraint one in which the constraint is defined by means of an auxiliary value function [Formula: see text] characterizing the reachable set. This set is therefore not given a priori but is naturally integrated in [Formula: see text] solving, in a viscosity sense, a nonlinear parabolic partial differential equation (PDE). Relying on the existing literature, we derive, in the interior of the domain, a Hamilton–Jacobi–Bellman characterization of [Formula: see text]. However, [Formula: see text] involves an additional controlled state variable coming from the diffusion of the probability of reaching the target and belonging to the compact set [Formula: see text]. This leads to nontrivial boundaries for [Formula: see text] that must be discussed. Our main result is thus the characterization of [Formula: see text] at those boundaries. We also provide examples for which comparison results exist for the PDE solved by [Formula: see text] on the interior of the domain.

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Hachmeister, Dirk. "Portfolio-Hedging von Zinsänderungsrisiken nach IAS 39." Controlling & Management 51, S1 (March 2007): 75–84. http://dx.doi.org/10.1365/s12176-012-0157-4.

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Zhu, Shushang, Wei Zhu, Xi Pei, and Xueting Cui. "Hedging crash risk in optimal portfolio selection." Journal of Banking & Finance 119 (October 2020): 105905. http://dx.doi.org/10.1016/j.jbankfin.2020.105905.

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Narayan, Paresh Kumar, and Susan Sunila Sharma. "Intraday return predictability, portfolio maximisation, and hedging." Emerging Markets Review 28 (September 2016): 105–16. http://dx.doi.org/10.1016/j.ememar.2016.08.017.

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ELOUERKHAOUI, YOUSSEF. "PRICING AND HEDGING IN A DYNAMIC CREDIT MODEL." International Journal of Theoretical and Applied Finance 10, no. 04 (June 2007): 703–31. http://dx.doi.org/10.1142/s0219024907004408.

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In this paper, we present a methodology for pricing and hedging portfolio credit derivatives in a dynamic credit model. Starting with a single-name Marshall–Olkin framework, we build a dynamic top-down version of the model, which is tractable and preserves the intuition of the original setting. In the first part of the paper, we derive analytically the Fourier transform of the loss variable and we study the skew dynamics implied by the model. In the second part, we develop a theory for dynamic hedging of portfolio credit derivatives. Since the market is incomplete, due to the residual correlation risk, perfect replication cannot be achieved. To find the hedging strategies, we use a quadratic risk minimization criterion.

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