Related papers: Optimal FX Hedge Tenor with Liquidity Risk
We propose a hedging approach for general contingent claims when liquidity is a concern and trading is subject to transaction cost. Multiple assets with different liquidity levels are available for hedging. Our risk criterion targets a…
We study the problem of optimally hedging the price exposure of liquidity positions in constant-product automated market makers (AMMs) when the hedge is funded by collateralized borrowing. A liquidity provider (LP) who borrows tokens to…
We develop the optimal trading strategy for a foreign exchange (FX) broker who must liquidate a large position in an illiquid currency pair. To maximize revenues, the broker considers trading in a currency triplet which consists of the…
In FX cash markets, market makers provide liquidity to clients for a wide variety of currency pairs. Because of flow uncertainty and market volatility, they face inventory risk. To mitigate this risk, they typically skew their prices to…
We consider learning a trading agent acting on behalf of the treasury of a firm earning revenue in a foreign currency (FC) and incurring expenses in the home currency (HC). The goal of the agent is to maximize the expected HC at the end of…
Portfolio optimisation typically aims to provide an optimal allocation that minimises risk, at a given return target, by diversifying over different investments. However, the potential scope of such risk diversification can be limited if…
In this article, we introduce an algorithm called Backward Hedging, designed for hedging European and American options while considering transaction costs. The optimal strategy is determined by minimizing an appropriate loss function, which…
This paper investigates the hedging performance of pegged foreign exchange market in a regime switching (RS) model introduced in a recent paper by Drapeau, Wang and Wang (2019). We compare two prices, an exact solution and first order…
Dealers make money by providing liquidity to clients but face flow uncertainty and thus price risk. They can efficiently skew their prices and wait for clients to mitigate risk (internalization), or trade with other dealers in the open…
Funding is a cost to trading desks that they see as an input. Current FVA-related literature reflects this by also taking funding costs as an input, usually constant, and always risk-neutral. However, this funding curve is the output from a…
We consider the hedging problem where a futures position can be automatically liquidated by the exchange without notice. We derive a semi-closed form for an optimal hedging strategy with dual objectives - to minimise both the variance of…
It is well known that traded foreign exchange forwards and cross currency swaps (CCS) cannot be priced applying overnight cash and carry arguments as they imply absence of funding advantage of one currency to the other. This paper proposes…
The trade off between risks and returns gives rise to multi-criteria optimisation problems that are well understood in finance, efficient frontiers being the tool to navigate their set of optimal solutions. Motivated by the recent advances…
It is well-known that using delta hedging to hedge financial options is not feasible in practice. Traders often rely on discrete-time hedging strategies based on fixed trading times or fixed trading prices (i.e., trades only occur if the…
In most real scenarios the construction of a risk-neutral portfolio must be performed in discrete time and with transaction costs. Two human imposed constraints are the risk-aversion and the profit maximization, which together define a…
Stablecoins promise par convertibility, yet issuers must balance immediate liquidity against yield on reserves to keep the peg credible. We study this treasury problem as a continuous-time control task with two instruments: reallocating…
This paper examines the volatility and covariance dynamics of cash and futures contracts that underlie the Optimal Hedge Ratio (OHR) across different hedging time horizons. We examine whether hedge ratios calculated over a short term…
The paper investigates quadratic hedging in a semimartingale market that does not necessarily contain a risk-free asset. An equivalence result for hedging with and without numeraire change is established. This permits direct computation of…
In complete markets, there are risky assets and a riskless asset. It is assumed that the riskless asset and the risky asset are traded continuously in time and that the market is frictionless. In this paper, we propose a new method for…
All the financial practitioners are working in incomplete markets full of unhedgeable risk-factors. Making the situation worse, they are only equipped with the imperfect information on the relevant processes. In addition to the market risk,…