Author: Harbourfront Technologies

Hedging with Puts: Do Volatility and Skew Signals Work?

Portfolio hedging remains a complex and challenging task. A straightforward method to hedge an equity portfolio is to buy put options. However, this approach comes at a cost—the option premiums—leading to performance drag. As a result, many research studies are focused on designing effective hedging strategies that offer protection while …

Applying Volatility Management Across Industries

Volatility management is a risk and portfolio management technique proposed by Moreira and Muir in 2017 . It has since been widely adopted by industry practitioners. The technique relies on the idea that volatility is autocorrelated but only weakly correlated with future returns. Practically, this means increasing exposure to the …

Using Random-Maturity Arbitrage to Price Perpetual Futures

Traditional futures contracts have maturity dates, upon which the futures price converges to the spot price. In the cryptocurrency market, the most popular contracts do not have a maturity date. They’re called perpetual contracts. Unlike fixed-maturity futures, perpetuals do not expire. This feature enhances the liquidity of the contract. Because …

Speeding Up Derivatives Pricing Using Machine Learning

A financial derivative is a financial contract whose value depends on the price of an underlying asset such as a stock, bond, commodity, or index. Accurate valuation of financial derivatives and their associated sensitivity factors is important for both investment and hedging purposes. However, many complex derivatives exhibit path-dependency and …

Leveraged ETFs: Do They Really Decay?

Leveraged ETFs (LETFs) are financial instruments designed to amplify the daily returns of an underlying index, typically by a factor of two or three. They have received criticism for performance drag or value erosion over time. Despite these concerns, they continue to attract attention and capital from investors. A recent …

Crypto Treasury Models: Balance Sheet Risk and Bitcoin Price Dependency

As crypto currencies gain broader acceptance, some corporations have begun including crypto in their balance sheets, forming new “crypto treasury” models. However, these models entail significant financial risks. Digital asset price volatility can translate into earnings variability and elevated refinancing risk—effects that are amplified when acquisitions are debt-financed. Reference  …