Special Issue "Financial Derivatives and Hedging"

A special issue of Journal of Risk and Financial Management (ISSN 1911-8074).

Deadline for manuscript submissions: closed (31 July 2017)

Special Issue Editor

Guest Editor
Prof. Dr. Donald Lien

College of Business, the University of Texas at San Antonio, San Antonio, TX 78249-0631, USA
Website | E-Mail
Interests: economics; development economics; finance; statistics; econometrics

Special Issue Information

Dear Colleagues,

In recent years, hedging with financial derivatives has ventured in several new directions. Hedging objectives are shifting from minimum variance, as a special case of, or an approximation to, expected utility maximization, to minimum Value at Risk or minimum expected shortfall. Dynamic hedging strategies are now incorporating realized volatility derived from high-frequency data, the so-called HEAVY models. Moreover, improved non-parametric estimation, shrinkage estimators, as well as quantile estimators all find their applications in hedge ratio decisions. Cross market interactions within the panel data models are also taken into account for better hedging performance. While these new methods mostly focus on forward and futures contracts, parallel considerations can be extended to options and other derivatives.

Topics to be considered for the special issue are, among others:
  • Modeling dynamic hedge ratios
  • HEAVY models
  • Dynamic copula models
  • Pricing of financial derivatives
  • Hedging with futures, options and swaps
  • Interest rate instruments
  • Advanced hedging measures

Prof. Dr. Donald Lien
Guest Editor

Manuscript Submission Information

Manuscripts should be submitted online at www.mdpi.com by registering and logging in to this website. Once you are registered, click here to go to the submission form. Manuscripts can be submitted until the deadline. All papers will be peer-reviewed. Accepted papers will be published continuously in the journal (as soon as accepted) and will be listed together on the special issue website. Research articles, review articles as well as short communications are invited. For planned papers, a title and short abstract (about 100 words) can be sent to the Editorial Office for announcement on this website.

Submitted manuscripts should not have been published previously, nor be under consideration for publication elsewhere (except conference proceedings papers). All manuscripts are thoroughly refereed through a single-blind peer-review process. A guide for authors and other relevant information for submission of manuscripts is available on the Instructions for Authors page. Journal of Risk and Financial Management is an international peer-reviewed open access quarterly journal published by MDPI.

Please visit the Instructions for Authors page before submitting a manuscript. The Article Processing Charge (APC) for publication in this open access journal is 350 CHF (Swiss Francs). Submitted papers should be well formatted and use good English. Authors may use MDPI's English editing service prior to publication or during author revisions.

Published Papers (4 papers)

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Research

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Open AccessArticle
OTC Derivatives and Global Economic Activity: An Empirical Analysis
J. Risk Financial Manag. 2017, 10(2), 13; https://doi.org/10.3390/jrfm10020013
Received: 6 April 2017 / Revised: 25 May 2017 / Accepted: 7 June 2017 / Published: 14 June 2017
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Abstract
That the global market for derivatives has expanded beyond recognition is well known. What is not know is how this market interacts with economic activity. We provide the first empirical characterization of interdependencies between OECD economic activity and the global OTC derivatives market. [...] Read more.
That the global market for derivatives has expanded beyond recognition is well known. What is not know is how this market interacts with economic activity. We provide the first empirical characterization of interdependencies between OECD economic activity and the global OTC derivatives market. To this end, we apply a vector-error correction model to OTC derivatives disaggregated across instruments and counterparties. The results indicate that with one exception, the heterogeneity of OTC contracts is too pronounced to be reliably summarized by our measures of economic activity. The one exception is interest-rate derivatives held by Other Financial Institutions. Full article
(This article belongs to the Special Issue Financial Derivatives and Hedging)
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Open AccessArticle
Capital Structure Arbitrage under a Risk-Neutral Calibration
J. Risk Financial Manag. 2017, 10(1), 3; https://doi.org/10.3390/jrfm10010003
Received: 18 October 2016 / Revised: 7 January 2017 / Accepted: 10 January 2017 / Published: 19 January 2017
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Abstract
By reinterpreting the calibration of structural models, a reassessment of the importance of the input variables is undertaken. The analysis shows that volatility is the key parameter to any calibration exercise, by several orders of magnitude. To maximize the sensitivity to volatility, a [...] Read more.
By reinterpreting the calibration of structural models, a reassessment of the importance of the input variables is undertaken. The analysis shows that volatility is the key parameter to any calibration exercise, by several orders of magnitude. To maximize the sensitivity to volatility, a simple formulation of Merton’s model is proposed that employs deep out-of-the-money option implied volatilities. The methodology also eliminates the use of historic data to specify the default barrier, thereby leading to a full risk-neutral calibration. Subsequently, a new technique for identifying and hedging capital structure arbitrage opportunities is illustrated. The approach seeks to hedge the volatility risk, or vega, as opposed to the exposure from the underlying equity itself, or delta. The results question the efficacy of the common arbitrage strategy of only executing the delta hedge. Full article
(This article belongs to the Special Issue Financial Derivatives and Hedging)
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Figure 1

Open AccessArticle
Humanizing Finance by Hedging Property Values
J. Risk Financial Manag. 2016, 9(2), 5; https://doi.org/10.3390/jrfm9020005
Received: 13 March 2016 / Revised: 15 May 2016 / Accepted: 30 May 2016 / Published: 10 June 2016
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Abstract
The recent financial crisis triggered the greatest recession since the 1930s and had a devastating impact on households’ wealth and on their capacity to reduce their indebtedness. In the aftermath, it became clear that there is significant room for improvement in property risk [...] Read more.
The recent financial crisis triggered the greatest recession since the 1930s and had a devastating impact on households’ wealth and on their capacity to reduce their indebtedness. In the aftermath, it became clear that there is significant room for improvement in property risk management. While there has been innovation in the management of corporate finance risk, real estate has lagged behind. Now is the time to expand the range of tools available for hedging households’ risks and, thus, to advance the democratization of finance. Property equity represents the major asset in households’ portfolios in developed and undeveloped countries. The present paper analyzes a set of potential innovations in real estate risk management, such as price level-adjusted mortgages, property derivatives, and home equity value insurance. Financial institutions, households, and governments should work together to improve the performance of the financial instruments available and, thus, to help mitigate the worst impacts of economic cycles. Full article
(This article belongs to the Special Issue Financial Derivatives and Hedging)

Other

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Open AccessLetter
Global Hedging through Post-Decision State Variables
J. Risk Financial Manag. 2017, 10(3), 16; https://doi.org/10.3390/jrfm10030016
Received: 11 July 2017 / Revised: 3 August 2017 / Accepted: 4 August 2017 / Published: 9 August 2017
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Abstract
Unlike delta-hedging or similar methods based on Greeks, global hedging is an approach that optimizes some terminal criterion that depends on the difference between the value of a derivative security and that of its hedging portfolio at maturity or exercise. Global hedging methods [...] Read more.
Unlike delta-hedging or similar methods based on Greeks, global hedging is an approach that optimizes some terminal criterion that depends on the difference between the value of a derivative security and that of its hedging portfolio at maturity or exercise. Global hedging methods in discrete time can be implemented using dynamic programming. They provide optimal strategies at all rebalancing dates for all possible states of the world, and can easily accommodate transaction fees and other frictions. However, considering transaction fees in the dynamic programming model requires the inclusion of an additional state variable, which translates into a significant increase of the computational burden. In this short note, we show how a decomposition technique based on the concept of post-decision state variables can be used to reduce the complexity of the computations to the level of a problem without transaction fees. The latter complexity reduction allows for substantial gains in terms of computing time and should therefore contribute to increasing the applicability of global hedging schemes in practice where the timely execution of portfolio rebalancing trades is crucial. Full article
(This article belongs to the Special Issue Financial Derivatives and Hedging)
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