Simulated Credit Loss Distribution

Ramaswamy, Srichander

doi:10.3905/jpm.2005.570155

Cited by 1 publication

(1 citation statement)

References 6 publications

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“…In these situations, one may prefer to use a sector-based index instrument for hedging. As a matter of fact, Ramaswami (1991) and Ramaswamy (2002Ramaswamy ( , 2005 among others exploit the insight that when the put is the money, the put behaves as equity, then hedging the default risk of the bond is tantamount to hedging equity risk. Naturally, the guarantor gains by using an index instrument for hedging closely related to his activities or highly correlated to his portfolio.…”

Section: The Multiple-underlying Assets Portfolio Casementioning

confidence: 99%

Hedging portfolios of financial guarantees

Lai

Langlois²,

Soumaré³

2008

JOR

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We propose a framework a la Davis et al. (1993) and Whalley and Wilmott (1997) to study dynamic hedging strategies on portfolios of financial guarantees in the presence of transaction costs. We contrast four dynamic hedging strategies including a utility-based dynamic hedging strategy, in conjunction with using an asset-based index, with the strategy of no hedging. For the proposed utility-based strategy, the portfolio rebalancing is triggered by the tradeoff between transaction costs and utility gains. Overall, using a Froot and Stein (1998) and Perold (2005) type of risk-adjusted performance measurement metric, we find the utility-based strategy to be a good compromise between the delta hedging strategy and the passive stance of doing nothing. This results is even stronger with higher transaction costs. However, if the insured firms assets are not traded, the guarantor can use an index-based security as hedging instrument, especially in a high transaction costs environment.

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Section: The Multiple-underlying Assets Portfolio Casementioning

confidence: 99%