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This post marks the beginning of an intriguing series where we explore and compare Large Language Models (LLMs), pitting open-source variants against ChatGPT in a detailed analysis.


In this installment, we’re comparing ChatGPT with various open-source models in a financial context. Our focus? Hedging strategies in a convertible bond portfolio, particularly in European and Asian markets. We used five models for this comparison: ChatGPT, two open-source base models, and two fine-tuned open-source models. 


The twist? The fine-tuning was done using 22,000 general knowledge prompts developed by Mason Analytics, not specifically financial data. Stay tuned for future blogs where we’ll explore RAG usage and Microsoft Prompt-Flow in our quest to challenge ChatGPT’s prowess.



Our testing ground was a financial prompt about implementing hedging strategies in a convertible bond portfolio. We used TextGenWebUI for prompting the open-source models, with parameters set to create a challenging but fair comparison. The responses were then analysed for various aspects like comprehensiveness, practicality and relevance to convertible bonds.


For prompting the open-source models, TextGenWebUI was utilised. The parameters set within TextGenWebUI were as follows:


Temperature: 0.7; Guidance Scale: 1; top_p: 0.9; top_k: 20; Repetition Penalty: 1.15;

typical_p: 1; tfs: 1


Operational mode selected was ‘chat-instruct’.


The two fine-tuned open-source models were fine-tuned using Ludwig.


The Prompt 

This prompt was created using Open-Orca_Mistral-7B-OpenOrca.

How can one efficiently implement hedging strategies in a convertible bond portfolio focused on European and Asian markets to minimise risks associated with market direction, volatility, credit risk, interest rates, exchange rates and dividend exposure?


LLM Responses

  1. ChatGPT Response

Efficiently implementing hedging strategies in a convertible bond portfolio, particularly one that is focused on European and Asian markets, involves a multi-faceted approach. Each type of risk – market direction, volatility, credit risk, interest rates, exchange rates, and dividend exposure – requires specific strategies. Here’s a broad overview of how one might approach this:


Market Direction and Volatility Risks: Equity Hedging: Since convertible bonds have equity-like features, hedging against market direction can involve using equity derivatives like put options or shorting the underlying stock. This can help protect against downside risk while maintaining upside potential.

Delta-Neutral Hedging: This involves adjusting the hedge to maintain a delta-neutral position, balancing the portfolio to be less sensitive to small movements in the underlying asset’s price.

Volatility Trading: Utilising options strategies that benefit from changes in volatility, such as straddles or strangles, can be effective, especially given that convertible bonds are sensitive to volatility in the underlying equity.

Credit Risk: Credit Default Swaps (CDS): 

Buying CDS can hedge against the risk of default by the bond issuer. This is particularly important in diverse markets like Europe and Asia, where credit risk can vary significantly across different countries and companies.

Diversification: Spreading investments across various issuers and sectors can reduce the impact of any single issuer’s credit event.

Interest Rate Risks: Interest Rate Derivatives: Using interest rate futures, swaps, or options can help manage sensitivity to interest rate changes. For instance, if interest rates are expected to rise, holding a position in interest rate futures can offset some of the losses in the bond’s value.

Asset-Liability Matching: Aligning the portfolio’s duration with the investment horizon can mitigate interest rate risk. 

Exchange Rate Risks: Currency Hedging: Utilising forward contracts, futures, options, or swaps in foreign exchange can help manage currency risk. This is particularly crucial when dealing with multiple currencies in European and Asian markets.

Natural Hedging: Investing in assets and liabilities denominated in the same foreign currency can also be a strategy to reduce exposure.

Dividend Protection Strategies: If the convertible bond is subject to dividend risk (e.g., the underlying stock’s dividends affect the bond’s value), using dividend futures or swaps can be a way to hedge this risk.

Portfolio Monitoring and Rebalancing: Regular monitoring and rebalancing of the portfolio are crucial. The effectiveness of hedging strategies can change over time due to market movements, changes in volatility, and evolving credit profiles of issuers.

Regulatory and Tax Considerations: Given the cross-border nature of the investments, staying compliant with the regulatory frameworks in both European and Asian markets is essential. Tax implications of hedging strategies also need to be considered.

Liquidity Management: Ensuring that the portfolio maintains sufficient liquidity to adjust positions quickly is important, especially in fast-moving markets.

Use of Technology and Models: Utilising sophisticated risk management software and financial models can help in accurately assessing the portfolio’s risk profile and the impact of various hedging strategies.

Expertise and Continuous Learning:Staying informed about market changes, regulatory updates, and new financial instruments is key. Continuous learning and consulting with experts in different markets can provide valuable insights.


Implementing these strategies requires a deep understanding of both the convertible bond market and the specific characteristics of European and Asian markets. It’s also important to tailor these strategies to the portfolio’s specific needs, considering factors like risk tolerance, investment horizon, and overall investment objectives.


ChatGPT Response Key Takeaway

ChatGPT offers a comprehensive and nuanced approach, excelling in covering a wide range of risks with detailed strategies and showcasing a strong understanding of risk management and technology application in finance.


  1. Open-Orca_Mistral-7B-OpenOrca Response

To efficiently implement hedging strategies in a convertible bond portfolio focused on European and Asian markets, consider the following steps:


Analyse your portfolio’s specific risks: Identify which risks (market direction, volatility, credit risk, interest rates, exchange rates, and dividend exposure) are most significant for your investments. This will guide your strategy selection and allow you to allocate resources effectively.

Diversify your portfolio: Spread your investments across different regions, industries, and issuers to reduce concentration risk. By diversifying, you can also benefit from opportunities that may arise due to varying economic conditions or market trends between Europe and Asia.

Use derivative instruments: Options, futures, swaps, and other derivatives can be used to hedge various types of risks. For instance, currency options can be used to hedge against exchange rate fluctuations; interest rate swaps can protect against changes in fixed-income securities; and credit default swaps can mitigate credit risk.

Employ dynamic hedging techniques: Continuously monitor your portfolio and adjust hedges as market conditions change. For example, if you notice increased market volatility, you might choose to increase the size of your option positions to better protect your investments.

Consider active management: Engage an experienced investment manager who specialises in convertible bonds and can actively adapt your hedging strategies based on changing market conditions and new investment opportunities.

Monitor your portfolio regularly: Keep track of your holdings, hedges, and overall performance to ensure that your strategies remain effective. Rebalance your portfolio as needed to maintain your desired level of risk exposure.

Stay informed about global economic developments: Understand how events in Europe and Asia could impact your investments by staying updated on news, regulatory changes, and industry trends.


By following these steps, you can efficiently manage the risks associated with your convertible bond portfolio while maximising potential returns. However, it’s important to consult with a financial advisor before implementing any hedging strategies, as they can provide personalised advice tailored to your unique circumstances and goals.


Open-Orca_Mistral-7B-OpenOrca Key Takeaway: (conducted by ChatGPT)

This model lays a good foundational understanding but falls short in the depth and detail of strategy explanation, particularly when compared to the more comprehensive approaches of other models.


  1. HuggingFaceH4_zephyr-7b-beta Response

To efficiently implement hedging strategies in a convertible bond portfolio focused on European and Asian markets, you need to consider multiple sources of risk simultaneously. Here are some suggestions:


Market Direction Risk: Use equity options or futures contracts to take short positions in underlying stocks to profit from declining markets while reducing overall portfolio risk. This strategy also provides additional liquidity during periods of high volatility.

Volatility Risk: Utilise Volatility Index (VIX) futures contracts or VIX-linked products to hedge against sudden spikes in volatility. Additionally, implementing a collar strategy involving selling out-of-the-money puts and buying in-the-money calls could be effective, as it reduces potential losses from downside movements while still allowing for upside participation.

Credit Risk: Consider purchasing credit default swaps (CDS) to mitigate credit risk on specific issuers or use a total return swap (TRS) structure that allows for the separation of credit and interest rate risk. TRS structures can also enable efficient portfolio rebalancing by exchanging the underlying bonds for cash without any impact on credit exposure.

Interest Rate Risk: Implement an interest rate swap (IRS) to convert floating-rate debt into fixed-rate debt or vice versa based on your preference. Swap spreads should be closely monitored since they directly affect your profitability.

Exchange Rates Risk: For portfolios exposed to foreign currencies, employ currency swaps to manage foreign exchange exposure. These swaps allow you to exchange principal and interest payments denominated in different currencies at predetermined exchange rates.

Dividend Exposure Risk: Use put options or dividend protection notes to protect against large drops in stock prices caused by significant dividend payments.


Remember to constantly monitor these risks’ interdependencies and correlations since their simultaneous occurrence could have unintended consequences. It’s essential to maintain a well-diversified portfolio across various asset classes and regions.


HuggingFaceH4_zephyr-7b-beta Key Takeaway:  (Conducted by ChatGPT)

It provides informative strategies but needs more detail on practical implementation, with a greater focus on global market dynamics to enhance its applicability in diverse financial scenarios.


  1. HuggingFaceH4_zephyr-7b-beta – Fine-Tuned Response

To efficiently implement hedging strategies in a convertible bond portfolio focused on European and Asian markets, here are some steps that may help minimise risks associated with market direction, volatility, credit risk, interest rates, exchange rates, and dividend exposure:


Market Direction Risk: Consider using put options or selling call options as a way of profiting from potential market downturns while also providing downside protection against significant losses. This strategy can be particularly effective during periods of high volatility.

Volatility Risk: Use variance swaps, which offer a more direct method of managing volatility risk compared to traditional options. By buying or selling these contracts, investors can take advantage of changing implied volatility levels to better align their portfolio’s risk profile with their investment objectives.

Credit Risk: Implementing a credit default swap (CDS) can serve as an effective tool for mitigating credit risk in convertible portfolios. These financial instruments allow investors to transfer credit risk to a third party in return for a premium payment.

Interest Rate Risk: Investors should consider implementing interest rate swaps (IRS) to manage fixed income securities’ interest rate risk. Through this strategy, they can lock in favourable interest rate terms and avoid unfavourable fluctuations in bond yields.

Exchange Rates Risk: Utilising currency futures or forward contracts can be beneficial when dealing with foreign currencies’ exchange rate risk. These tools enable investors to fix future exchange rates at current prices, minimising uncertainty about exchange rate movements.

Dividends Exposure: Using protective puts, which offer the right but not the obligation to sell a security at a specific price before a specified date, can help mitigate the impact of dividend payments. These contracts provide investors with the option to sell the underlying asset at a predetermined price, regardless of whether it rises or falls after the ex-dividend date.


These strategies can be implemented individually or in combination, depending on the specific needs and objectives of your convertible bond portfolio. It’s essential to remember that each hedge comes with its own set of costs, benefits and risks, so careful consideration and analysis must be taken into account before implementation.


HuggingFaceH4_zephyr-7b-beta – Fine-Tuned Key Takeaway:  (Conducted by ChatGPT)

It offers solid, practical strategies but lacks depth in areas like technology integration, regulatory aspects, and liquidity management, which are crucial for comprehensive financial planning.


  1. 7.2 model Response

To efficiently implement hedging strategies in your convertible bond portfolio focused on European and Asian markets, here are some steps that you could follow:


Identify the specific risks that you want to mitigate or hedge against, such as market direction, volatility, credit risk, interest rates, exchange rates, and dividend exposure. This will help you select appropriate hedging instruments.


Analyse the correlation between the underlying assets (convertible bonds) and potential hedges. For instance, if you have a portfolio of convertible bonds denominated in euros, you may consider using options or futures contracts based on the Euro Stoxx 50 index or German Bunds to hedge against interest rate and currency risks, respectively.


Choose hedging instruments that align with your investment goals, time horizon, and risk appetite. Options, swaps, futures, and other derivatives can be used to create customised hedging solutions tailored to your needs.


Implement dynamic hedging strategies that adjust the level of hedging over time. This approach involves continuously monitoring market conditions and adjusting the hedging positions accordingly. Dynamic hedging allows you to balance the costs and benefits of hedging while maximising returns.


Monitor the effectiveness of your hedging strategy by regularly reviewing its performance. Use analytical tools to measure the impact of hedging on your portfolio’s return, volatility, and other key metrics. Adjust your hedging strategy as necessary to optimise its performance.


Finally, work closely with your financial advisor or investment manager, who can help you design and execute efficient hedging strategies that meet your objectives while minimising costs and risks.


HuggingFaceH4_zephyr-7b-alpha – Fine-Tuned Key Takeaway: (Conducted by ChatGPT)

This model provides a thorough overview with an emphasis on dynamic hedging and the importance of professional advice, but it could benefit from more specific examples and insights into technological and regulatory considerations.


ChatGPT Analysis of the Performance of Responses


ChatGPT: Scored 8.5/10. 

ChatGPT’s response was a comprehensive guide, covering a wide range of risks and strategies with a strong focus on risk management and the use of technology. It was detailed, well-structured, and highly relevant to convertible bonds.


HuggingFaceH4_zephyr-7b-alpha – Fine-Tuned: Scored 7.8/10. 

This model provided a thorough overview, touching on dynamic hedging and the importance of working with financial advisors. However, it lacked specific examples and deeper insights into technology use and regulatory considerations.


HuggingFaceH4_zephyr-7b-beta – Fine-Tuned: Scored 7.2/10. 

Similar to its alpha counterpart, this model offered solid strategies but lacked depth in areas like technology, regulatory aspects, and liquidity management.


HuggingFaceH4_zephyr-7b-beta: Scored 7.2/10. 

This response was informative but needed more detail on practical implementation challenges and a stronger focus on global market dynamics.


Open-Orca_Mistral-7B-OpenOrca: Scored 7.2/10. 

This model provided a good foundation but lacked the depth and detail seen in ChatGPT’s response, especially in explaining strategy specifics.



  • Is it worth haveing a section here about disucssion topics including: What is the difference between a score of 8.5 and 7.8. Is it a meaningful difference?
  • How likely is ChatGPT to, for whatever reason, mark its own work higher, thereby compromising the value of the marking scheme?how would the other models score the Responses?
  • What criteria was provided to ChatGPT to generate the assessment of the quality of each response? Was the name of the LLM provided to ChatGPT?


In this round, ChatGPT emerged as the clear winner. The fine-tuned models, despite not being specifically fine-tuned on financial data, performed admirably but couldn’t quite match ChatGPT’s depth and breadth. This experiment highlights the potential of open-source models, but also underscores the sophistication and nuanced understanding that ChatGPT brings to complex financial topics.


What’s Next?

Our next benchmarks will revolve around RAG usage and employing Microsoft PromptFlow for prompting multiple open-source models. This time, we’ll fine-tune the models with domain-specific data to see if we can surpass ChatGPT’s performance. Stay tuned for more insights as we continue to explore the capabilities of these open-source AI models in the world of finance!


We will also be putting GPTs to the test. We’ll explore how they fare against ChatGPT and open-source alternatives in handling complex financial scenarios. Our focus will be on assessing their ability to understand and generate content that’s not just accurate and relevant, but also tailored to the nuanced needs of the financial sector. Stay Tuned!



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