Hedge Design: A Systematic Approach

Pelegrine Securities, 2012

20 Pages Posted: 21 Apr 2016

See all articles by Anthony Seymour

Anthony Seymour

University of Cape Town (UCT)

Florence Chikurunhe

Peregrine Securities

Emlyn James Flint

Legae Peresec; Department of Actuarial Science, University of Cape Town

Date Written: September 26, 2012

Abstract

Equity derivatives offer fund managers a great deal of flexibility in managing the risk of a portfolio and shaping the overall future return distribution. It can, however, be difficult for fund managers to decide on an appropriate protection strategy, both in terms of the proportion of equity to hedge and the specific instruments to be used. A simulation and optimization platform has been developed at Peregrine Securities that allows the hedge decision problem to be approached via optimization so that a portfolio consistent with the risk and return preferences of the fund manager can be found.

We motivate the need for such a report and describe the suggested process for finding an optimal allocation. Furthermore, representative sections from the hedge decision report are shown to highlight the factors that need to be considered. We also discuss an interesting and useful extension to the platform that enables the analysis of portfolios relative to a benchmark. In addition to relative returns, we are also able to incorporate information about the current value of the portfolio relative to the benchmark in the hedging decision process through an analysis of the funding level.

Keywords: Hedge design, derivative hedge optimisation

JEL Classification: C15, G13, C5, C6

Suggested Citation

Seymour, Anthony and Chikurunhe, Florence and Flint, Emlyn James, Hedge Design: A Systematic Approach (September 26, 2012). Pelegrine Securities, 2012. Available at SSRN: https://ssrn.com/abstract=2767414 or http://dx.doi.org/10.2139/ssrn.2767414

Anthony Seymour

University of Cape Town (UCT) ( email )

Private Bag X3
Rondebosch, Western Cape 7701
South Africa

Florence Chikurunhe

Peregrine Securities ( email )

21 Main Road
Claremont
Cape Town, Western Cape 7700
South Africa
+27117227551 (Phone)

HOME PAGE: http://www.peregrine.co.za

Emlyn James Flint (Contact Author)

Legae Peresec ( email )

15 Cavendish Street
Claremont
Cape Town, Western Cape 7700
South Africa
27117227556 (Phone)

HOME PAGE: http://www.legaeperesec.co.za

Department of Actuarial Science, University of Cape Town ( email )

Actuarial Science Section, University of Cape Town
Private Bag X3, Rondebosch
Cape Town, Western Cape 7701
South Africa
+27 21 650 2475 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
92
Abstract Views
564
rank
293,817
PlumX Metrics