Visualize dynamic hedging

(via an interactive GUI)

Description

Function HEDGEDEMO aims to help students and instructors of finance visualize trading demands of simple static or dynamic value-hedging strategies. In a single-factor setting, 2-asset hedge portfolios are constructed to match, at a point in time, value and delta of the hedged portfolio, consisting of 1-2 assets, one unit of each. (Delta is estimated by shifting the factor path by +/- 0.01). Factor dynamics are described by a Matlab expression or function that defines vector 'X' in terms of vector 'T', where T = StartDate:EndDate. With 'X' defined and evaluated, paths of asset prices are similarly given by Matlab expressions or functions inputting 'X' and 'T'.

• Required Products: Financial Toolbox
• MATLAB release: MATLAB 7.4 (R2007a)
• Other requirements: Built-in examples/defaults call functions of Financial Toolbox; these can be replaced with arbitrary alternatives.

[Olivier B.]

Hi,
I got an error when pressing Go, after having generated the time series :
"
??? Index exceeds matrix dimensions.

Error in ==> hedgedemo>changeHedgeAssetSeries/changeHedgeValueSeries at 411
        tradeValue = tradeQuant.*aPrice(3:4,:);

Error in ==> hedgedemo>changeHedgeAssetSeries at 370
    changeHedgeValueSeries

Error in ==> hedgedemo>fillFrame41/addFreqPanel/constructHedge at 184
            changeHedgeAssetSeries

??? Error while evaluating uicontrol Callback
"

and sometimes
"
Warning: Matrix is singular, close to singular or badly scaled.
         Results may be inaccurate. RCOND = NaN.
> In hedgedemo>changeHedgeAssetSeries/changeHedgeQuantSeries at 379
  In hedgedemo>changeHedgeAssetSeries at 369
  In hedgedemo>fillFrame41/addFreqPanel/constructHedge at 184
??? Index exceeds matrix dimensions.
"

It does that, even when using inputs displayed on the jpg example.
Do you have an idea ?

[Dimitri Shvorob]

Ouch :( Thank you for the report, Olivier, I'll look into this. The singularity warning, however, may be legitimate: we find the quantities by solving Aq = b, where A packs prices and deltas, and A can have short rank.

[Ning]