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Optimal Hedging with Margin Constraints and Default Aversion and its Application to Bitcoin Perpetual Futures

SSRN, ISSN: 1556-5068
2021
  • 10
    Citations
  • 3,424
    Usage
  • 10
    Captures
  • 0
    Mentions
  • 0
    Social Media
Metric Options:   Counts1 Year3 Year

Metrics Details

  • Citations
    10
    • Citation Indexes
      10
  • Usage
    3,424
    • Abstract Views
      2,815
    • Downloads
      609
  • Captures
    10
  • Ratings
    • Download Rank
      89,589

Article Description

We consider a futures hedging problem subject to a budget constraint that limits the ability of a hedger with default aversion to meet margin requirements. We derive a semi-closed form for an optimal hedging strategy with dual objectives — to minimize both the variance of the hedged portfolio and the probability of forced liquidations due to margin calls. An empirical analysis of bitcoin shows that the optimal strategy not only achieves superior hedge effectiveness, but also reduces the probability of forced liquidations to an acceptable level. We also compare how the hedger's default aversion impacts the performance of optimal hedging based on minute-level data across major bitcoin spot and perpetual futures markets.

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