Balanced Hedging and Trading Baskets
نویسندگان
چکیده
A basket is a set of instruments that are held together because its statistical profile delivers a desired goal, such as hedging or trading, which cannot be achieved through the individual constituents or even subsets of them. Multiple procedures have been proposed to compute hedging and trading baskets, among which balanced baskets have attracted significant attention in recent years. Unlike Principal Component Analysis (PCA) style methods, balanced baskets spread risk or exposure across their constituents without requiring a change of basis. Practitioners typically prefer balanced baskets because their output can be understood in intuitive terms. We review three methodologies for determining balanced baskets, analyze the features of their respective solutions and provide Python code for their calculation. We also introduce a new method for reducing the dimension of a covariance matrix, called Covariance Clustering, which addresses the problem of numerical ill-conditioning without requiring a change of base.
منابع مشابه
Hedging Demands in Hedging Contingent Claims
Minimum-variance hedging of a contingent claim in discrete time is suboptimal when the contingent claim is hedged for multiple periods and the objective is to maximize the expected utility of cumulative hedging errors. This is because the hedging errors are not independent. The difference between a minimum-variance hedge and the optimal multiperiod hedge is called the hedging demand and depends...
متن کاملM ay 2 00 8 Hedging strategies and minimal variance portfolios for European and exotic options in a Lévy market
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 achi...
متن کاملHedging strategies and minimal variance portfolios for European and exotic options in a Levy market
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 achi...
متن کاملO ct 2 00 8 Hedging strategies and minimal variance portfolios for European and exotic options in a Lévy market
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 achi...
متن کاملA Closed Form Approach to the Valuation and Hedging of Basket and Spread Options
We develop a new approach to valuing and hedging basket and spread options. We consider baskets of assets with potentially negative portfolio weights (spread options are a subclass of such basket options). The basket distribution is approximated using a generalized family of log-normal distributions. This approximation copes with negative basket values as well as negative skewness of the basket...
متن کامل