82,891
edits
Template:Capsule delta-hedging: Difference between revisions
Template:Capsule delta-hedging (view source)
Revision as of 14:32, 24 January 2020
, 24 January 2020no edit summary
Amwelladmin (talk | contribs) No edit summary |
Amwelladmin (talk | contribs) No edit summary |
||
| Line 1: | Line 1: | ||
===[[Delta-hedging]]=== | |||
In [[swap]] [[hedging]], matching your [[hedge]] ''exactly'' to your swap obligation, and remaining market-neutral — or as market neutral as you can. (strictly you could delta hedge with a delta other than one, I suppose, but most folks mean delta-''one'' hedging. This is what [[prime broker]]s do when they trade [[synthetic equity swaps]]. They make their money not from trading equities, but by lending money to their clients, so their clients can trade equities. | In [[swap]] [[hedging]], matching your [[hedge]] ''exactly'' to your swap obligation, and remaining market-neutral — or as market neutral as you can. (strictly you could delta hedge with a delta other than one, I suppose, but most folks mean delta-''one'' hedging. This is what [[prime broker]]s do when they trade [[synthetic equity swaps]]. They make their money not from trading equities, but by lending money to their clients, so their clients can trade equities. | ||
Say a client requests a [[synthetic equity]] position on Vodafone from its [[prime broker]]. To accommodate this, [[prime broker]] goes into the market and buys VOD shares at 10. Broker fills its client’s swap order at 10. Voila: [[prime broker]] is perfectly hedged, [[delta-one]] for this new [[swap]] position: if VOD goes up, the [[PB]]’s swap obligation goes up. If VOD goes down, [[PB]]’s swap obligation goes down. | Say a client requests a [[synthetic equity]] position on Vodafone from its [[prime broker]]. To accommodate this, [[prime broker]] goes into the market and buys VOD shares at 10. Broker fills its client’s swap order at 10. Voila: [[prime broker]] is perfectly hedged, [[delta-one]] for this new [[swap]] position: if VOD goes up, the [[PB]]’s swap obligation goes up. If VOD goes down, [[PB]]’s swap obligation goes down. | ||
| Line 8: | Line 8: | ||
If this is the only VOD position on its books, it can do this by borrowing some [[treasury securities]] in the market, collateralising that with the VOD stock, and giving those [[treasuries]] to the treasury department in reduction of its debt. The treasury department ''likes'' treasury securities. They count as almost as good as [[money]].<ref>Note this process is economically identical to [[rehypothecation]] of a long custody position in [[cash prime brokerage]].</ref> | If this is the only VOD position on its books, it can do this by borrowing some [[treasury securities]] in the market, collateralising that with the VOD stock, and giving those [[treasuries]] to the treasury department in reduction of its debt. The treasury department ''likes'' treasury securities. They count as almost as good as [[money]].<ref>Note this process is economically identical to [[rehypothecation]] of a long custody position in [[cash prime brokerage]].</ref> | ||
Now if the [[PB]] has two VOD offsetting positions on its books: one long and one short, its physical hedges cancel each other out, and it can (and, indeed, must) sell its VOD stock to remain market neutral, and in that case can also return money to its treasury department to reduce its funding cost. | Now if the [[PB]] has two VOD offsetting positions on its books: one long and one short, its physical hedges cancel each other out, and it can (and, indeed, must) sell its VOD stock to remain market neutral, and in that case can also return money to its treasury department to reduce its funding cost. <br> | ||