Hedging for credit instruments (Yale Lecture Video)

Yale Lecture from Fall, 2009.



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Financial Theory (ECON 251)

00:00 - Chapter 1. Fundamentals of Hedging
15:38 - Chapter 2. The Principle of Dynamic Hedging
24:26 - Chapter 3. How Does Hedging Generate Profit?
43:48 - Chapter 4. Maintaining Profits from Dynamic Hedging
54:08 - Chapter 5. Dynamic Hedging in the Bond Market
01:10:30 - Chapter 6. Conclusion

Complete course materials are available at the Open Yale Courses website: http://open.yale.edu/courses
This course was recorded in Fall 2009.
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What does it mean to hedge?

To hedge means to minimize exposure to risks you don't like, while maximizing exposure of uncertainties where you have an edge. It is a simple concept, and obviously requires deep understanding of relevant financial products and microeconomics.

Hedge Funds are then vehicles offering sophisticated asset management strategies that require various manners of hedging. This is how investment bank trading desks make money. This is how they consistently out perform the simple buy & hold funds.

Hedge Fund Strategies (existing NZ funds all long + bleeding)

At Global Fund Data, it's possible to review strategies applied by successful hedge funds today, along with their performance profiles. Of course, specific strategy details are not available, as expected from any other form of trade secrets. 

NZ Hedge Funds

Interestingly, existing New Zealand funds are practically all Long & Hold types with large exposure to volatility, market risks. As the world braces for European sovereign credit uncertainties, volatility is expected to remain high for a while into the future. This is bad for any buy & hold equity / fixed income racket.
Today's market participants are much more sophisticated, Buy & Hold is obsolete as means of asset management.

As investors become increasingly sophisticated and aware of available alternative investment strategies, the local funds will likely have to adapt and offer better concepts to hold off redemptions.

Investors letter from Citadel

Citadel is a successful hedge fund well known for proprietary quantitative strategies. I find this letter quite motivating.

Citadel Letter Dec 22

The Complete Arbitrage Deskbook (book review)

This book is pretty informative for anyone new to arbitrage. Stephane Reverre explains a fairly comprehensive field of existing means of arbitrage (up to the year of the book, 2001), covering a very wide range of instruments and explains both technical and economical grounds behind the mentioned market inefficiencies.


Prerequisite knowledge

A good understanding of statistics is necessary to fully understand some of the concepts from this book. The reader is also expected to have basic understanding of corporate finance and familiarity with intermediate financial mathematics.


Some interesting things from the book

Mathematical explanations for Index Arbitrage opportunities and expected mispricings (Index futures vs. Spot ETF, component portfolio, etc.)

Risk arbitrage exploiting scheduled corporate events (mergers and acquisitions)

Existing statistical arbitrage (e.g. pair trading) means

Examples of actual arbitrage opportunities and exploitations­­ off empirical data