Hedge Simulation Tool

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Recently developed to complement our trading and advisory activities, our proprietary Hedge Simulation Tool™ allows Milliman experts to test various hedging strategies and form expectations about performance before executing a client's program. For instance, tighter or looser trading thresholds can be modeled to see how they affect earnings volatility and program costs.

Milliman consultants also can experiment with a variety of financial instruments to see which combination might best meet clients' goals.

Available hedging instruments include:

  • equity futures
  • equity options
  • equity variance swaps
  • interest rate swaps and futures
  • interest rate options
  • currency forwards and futures
  • currency options

The user can select all scenarios, or zero in on a specific subset of particularly good or bad scenarios, and then generate both a detailed description of forecast results and a concise summary.

Simulations run with this tool help Milliman experts better understand the possible outcomes of a variety of hedging strategies, balancing the desire to reduce transaction costs with the need to limit unhedged risk. The tool provides the ability to simulate trading intervals as short as every 30 minutes. This simulation helps consultants establish the realistic trading policies that will be used when execution of a client's hedging program gets underway.

The availability of the Hedge Simulation Tool—the fruit of our substantial investment in capital-markets research—spotlights how Milliman continues to push the frontiers of industry best practice.

More return, lower risk

The Hedge Simulation Tool might for example indicate best results with an asymmetric strategy such as hedging gamma (or secondary sensitivity to equity-index movements) when the portfolio was net short gamma, while leaving gamma unhedged when the portfolio was net long. The bottom line for the client: potentially higher returns with lower risk.

Next Steps

For more information, contact: