Lecture by Prof. Juliusz Jabłecki on 9 February

We cordially invite you to attend the seminar organized by the QFRG and DSLab research centres. The lecture, entitled “Carry, Convexity and Reliability – Navigating Tail Risk Hedging Dilemmas”, will be delivered by Prof. Juliusz Jabłecki, a researcher at the Faculty of Economic Sciences in the Department of Quantitative Finance and Machine Learning. The study is co-authored by Chris Marais and Bruno Schwalbach. [The abstract of the presentation is provided below.]

The seminar will be held in a hybrid format: in person in room B002 at the Faculty of Economic Sciences, and remotely via the Zoom platform. Please contact us at XwS#DH%q2Nj=5u1KnkPx6R]#[IjCs0'lSMFYzBk&TTPF%%? if you wish to receive the link to the meeting.

The seminar will begin at 19:00. Please join in person or log in by 18:55.

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This paper revisits the debate about the merits of tail risk hedging – a strategy designed to produce large payoffs in severe equity drawdowns using negatively correlated, convex instruments such as put options. With the literature split between proponents and detractors, we argue that the discussion about the merits of tail hedges is best framed as a trilemma among carry (the predicable cost of protection), convexity (payoff in adverse states of the world), and reliability (the likelihood protection delivers as and when needed). Building on a second-order Taylor expansion of option mark-to-market P&L, we map these features to option Greeks which in turn allows us to consistently compare different hedge parameterizations across a range of adverse scenarios. Using Monte Carlo experiments and backtests on US equity options data from 1996 through 2025 we show that: (i) longer-dated, deeper OTM puts deliver superior reliability per unit cost, as their convexity decays more slowly with moneyness than carry; (ii) fully and partially delta-hedged overlays limit the dilution of equity market beta while concentrating payoff in the convexity complex (gamma, vega, vanna, volga) and thus tend to be preferable to outright hedges; (iii) even simply devised monetization rules can materially improve outcomes relative to passive buy-and-roll implementations.