Book Image

Mastering R for Quantitative Finance

Book Image

Mastering R for Quantitative Finance

Overview of this book

This book is intended for those who want to learn how to use R's capabilities to build models in quantitative finance at a more advanced level. If you wish to perfectly take up the rhythm of the chapters, you need to be at an intermediate level in quantitative finance and you also need to have a reasonable knowledge of R.
Table of Contents (15 chapters)
14
Index

Hedging of derivatives


Hedging means to create a portfolio that offsets the risk of the original exposure. As risk is measured by the fluctuation of the future cash flow, the goal of hedging is usually the reduction of the variance of the total portfolio's value. The first chapter of Daróczi et al. (2013) presents the optimal hedging decision in the presence of the basis risk, when the hedging instrument and the position to be hedged are different. This often happens at the hedging of commodity exposure, because commodities are traded on exchanges, where only standardized (maturity, quantity, and quality) contracts are available.

The optimal hedge ratio is the proportion of the hedging instrument as a percentage of the exposure that minimizes the volatility of the whole position. In this chapter, we will deal with the hedging of derivative positions, assuming that the underlying is also traded in the OTC market; therefore, there will be no mismatch between the exposure and the hedging derivative...