A micro-hedging solution developed by Kantox, Dynamic Hedging
, fully is claimed to automate FX risk management to create greater efficiencies for treasurers.
Three of its reporting lines, Dynamic Hedging
, Passive Hedging and Multi-Product contributed to the rise in assets.
The insights these models provide can help guide decision-making and preparation for the possible events, as the finance team might choose to use dynamic hedging
to mitigate the event's possible outcomes.
There have been several proposed strategies for natural hedging, ranging from static hedging approaches in Tsai, Wang, and Tzeng (2010) and Gatzert and Wesker (2012) to the dynamic hedging
approaches in Wang et al.
For dynamic hedging
, the composition of the hedging portfolio is adjusted through time as additional information becomes available.
Wang, "Dynamic hedging
with futures: a copula-based GARCH model," Journal of Futures Markets, vol.
and Sultan, J., 'Time-varying Distributions and Dynamic Hedging
with Foreign Currency Futures', 1993, Journal of Financial and Quantitative Analysis, vol.
Risk is tightly controlled via a dynamic hedging
strategy aimed at reducing the exchange rate risk.
While the strategies do not ensure a profit or guarantee protection against a loss, they employ continual risk management and dynamic hedging
techniques aimed at reducing a client's exposure to extreme market swings so as to provide a more consistent pattern of returns.
is costly because of sharp delta increases during the option life and oscillations of gamma between fixing dates.
This form of tactical risk management doesn't use any excessively fancy derivatives -- it's just selling index call options, after all -- but, historically, it can and does generate alpha: Over the past 10 years, Gargoyle's dynamic hedging
strategy has produced an annual compound rate of return of 3.5%, compared with a passive options overlay rate of return of 1.6% (represented as the options component of the BXM, a Chicago Board of Exchange stock-and-option strategy index).
The hedging effectiveness is measured from the perspective of traders who want to minimize the uncertainty of their derivative positions via dynamic hedging
. To parallel the standard market practice of applying option-pricing models, we frequently recalibrate the models and focus on exotic options as the target options in the test procedure.