Friday, June 20, 2008

Proxy Hedging ETFs

Many ETFs have Short (-I Delta), Long (+1 Delta), Ultra Short (-2 Delta), Ultra Long (+2 Delta) version. The ETF with the liquid options (better bid ask spreads, implied volatility) can be used to hedge the others.

Closely correlated option can also be used hedge other ETFs and perhaps stocks also. Some formulas to ponder about.
Delta * Expected Correlation * Confidence Factor
Delta * Beta * Confidence Factor

Best regards, Suminda Sirinath Salpitikorala

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