Option pricing and portfolio hedging under the mixed hedging strategy

2015 ◽  
Vol 424 ◽  
pp. 194-206 ◽  
Author(s):  
Xiao-Tian Wang ◽  
Zhong-Feng Zhao ◽  
Xiao-Fen Fang
Keyword(s):  
Option Pricing ◽  
Hedging Strategy

The Condition of the Conditionality

2021 ◽  
Author(s):  
Tumellano Sebehela
Keyword(s):  
Probability Theory ◽  
Option Pricing ◽  
Simultaneous Occurrence ◽  
Option Value ◽  
Hedging Strategy ◽  
Compound Options ◽  
Exotic Option ◽  
Exchange Options ◽  
Nikodym Derivative ◽  
Exchange Option

The interdependence of options is common among compound options. Moreover, this interconnectedness is synonymous with probability theory-how a set of axioms are treated. The conditionality, where one option value is dependent on another option, has spilled over to option pricing, especially exchange options. However, it seems that no study has explored whether that simultaneous occurrence of two options is conditional or not. This study uses conditional approaches (Radon–Nikodým derivative and probability theory) to illustrate conditionality in an exchange option. Furthermore, hedging strategy is derived based on straddles. The results show that due to conditionality another exotic option, tri-conditional option (also known as triple option) is derived. The hedging of a triple option encompasses both dynamic and static techniques.

QUADRATIC HEDGING FOR THE BATES MODEL

2007 ◽  
Vol 10 (05) ◽  
pp. 873-885 ◽  
Author(s):  
FRIEDRICH HUBALEK ◽  
CARLO SGARRA
Keyword(s):  
Option Pricing ◽  
Explicit Expression ◽  
Martingale Measure ◽  
Risk Minimization ◽  
Hedging Strategy ◽  
Preliminary Results ◽  
Quadratic Hedging ◽  
The Mean ◽  
Mean Variance ◽  
Martingale Case

In the present paper we give some preliminary results for option pricing and hedging in the framework of the Bates model based on quadratic risk minimization. We provide an explicit expression of the mean-variance hedging strategy in the martingale case and study the Minimal Martingale measure in the general case.

scholarly journals On Option Pricing in Illiquid Markets with Jumps

2013 ◽  
Vol 2013 ◽  
pp. 1-5
Author(s):  
Youssef El-Khatib ◽  
Abdulnasser Hatemi-J
Keyword(s):  
Option Pricing ◽  
Continuous Process ◽  
Price Impact ◽  
Hedging Strategy ◽  
Illiquid Markets ◽  
Black Scholes Model ◽  
Black Scholes ◽  
Random Jumps ◽  
Global Stock Markets ◽  
Recent Financial Crisis

One of the shortcomings of the Black-Scholes model on option pricing is the assumption that trading of the underlying asset does not affect the price of that asset. This assumption can be fulfilled only in perfectly liquid markets. Since most markets are illiquid, this assumption might be too restrictive. Thus, taking into account the price impact on option pricing is an important issue. This issue has been dealt with, to some extent, for illiquid markets by assuming a continuous process, mainly based on the Brownian motion. However, the recent financial crisis and its effects on the global stock markets have propagated the urgent need for more realistic models where the stochastic process describing the price trajectories involves random jumps. Nonetheless, works related to markets with jumps are scant compared to the continuous ones. In addition, those previous studies do not deal with illiquid markets. The contribution of this paper is to tackle the pricing problem for options in illiquid markets with jumps as well as the hedging strategy within this context, which is the first of its kind to the authors’ best knowledge.

Risk-sharing finance governance: Islamic vs conventional indexes option pricing

2018 ◽  
Vol 44 (5) ◽  
pp. 540-550
Author(s):  
Haykel Hamdi ◽  
Jihed Majdoub
Keyword(s):  
Option Pricing ◽  
Risk Sharing ◽  
Research Question ◽  
Option Price ◽  
Empirical Literature ◽  
Risk Governance ◽  
Hedging Strategy ◽  
Content Type ◽  
Dynamic Case ◽  
Conventional Counterpart

Purpose Risk governance has an important influence on the hedging performances in option pricing and portfolio hedging in both discrete and dynamic case for both conventional and Islamic indexes. The paper aims to discuss these issues. Design/methodology/approach This paper explores option pricing and portfolio hedging in a discrete and dynamic case with transaction costs. Monte Carlo simulations are applied to both conventional and Islamic indexes in US and UK markets. Simulations show that conventional and Islamic assets do not exhibit the same price and portfolio hedging strategy governance. Findings The authors conclude that Islamic assets show different option price and hedging strategy compared to their conventional counterpart. Originality/value The research question of this paper aims at filling the gap in the empirical literature by exploring option price and hedging structure for both conventional and Islamic indexes in US and UK stock markets.

Option valuation and hedging in markets with a crunch

2017 ◽  
Vol 44 (5) ◽  
pp. 801-815 ◽  
Author(s):  
Youssef El-Khatib ◽  
Abdulnasser Hatemi-J
Keyword(s):  
Financial Crisis ◽  
Option Pricing ◽  
Financial Risk ◽  
Asset Price ◽  
Hedging Strategy ◽  
Numerical Application ◽  
Content Type ◽  
Hedging Strategies ◽  
Option Pricing Model ◽  
Better Than

Purpose Option pricing is an integral part of modern financial risk management. The well-known Black and Scholes (1973) formula is commonly used for this purpose. The purpose of this paper is to extend their work to a situation in which the unconditional volatility of the original asset is increasing during a certain period of time. Design/methodology/approach The authors consider a market suffering from a financial crisis. The authors provide the solution for the equation of the underlying asset price as well as finding the hedging strategy. In addition, a closed formula of the pricing problem is proved for a particular case. Furthermore, the underlying price sensitivities are derived. Findings The suggested formulas are expected to make the valuation of options and the underlying hedging strategies during a financial crisis more precise. A numerical application is provided for determining the premium for a call and a put European option along with the underlying price sensitivities for each option. Originality/value An alternative option pricing model is introduced that performs better than existing ones, especially during a financial crisis.

Strategi Pengelolaan Risiko dan Peningkatan Kualitas Pengelolaan Kas Negara

2017 ◽  
Vol 2 (2) ◽  
pp. 43-54
Author(s):  
Agung Mulyono
Keyword(s):  
Interest Rates ◽  
Financial Risk ◽  
Vector Autoregression ◽  
Secondary Market ◽  
Key Factors ◽  
Bond Price ◽  
Hedging Strategy ◽  
Foreign Loan ◽  
Term Operation ◽  
Loan Interest Rates

Cash management is  one of treasury’s main functions in which has a potential financial risk. A potential financial risk emerges when State Treasurer manages cash surplus and or/ shortages in order to maintain optimum liquidity. By applying Vector Autoregression (VAR) system on empirical data provided by Bank Indonesia and the Ministry of Finance of Indonesia, we found that currency value  flunctuation is a significant factor for repayment value of foreign loan. Interest rates and amount of government’s bond held by foreign investors are also variables impacted on government’s bond price movement in secondary market. Currency value  flunctuation and price of government’s bond in secondary market are the key factors that have to be considered by State Treasurer (BUN) in managing state’s money. Hedging strategy by using derivatif product is possible to be utilized by State Treasurer (BUN) due to it’s flexibility for short-term operation.   Abstrak Pengelolaan kas negara merupakan salah satu fungsi pokok perbendaharaan yang dalam proses pelaksanaannya menyimpan potensi berbagai risiko keuangan. Risiko keuangan, khususnya dalam investasi berpotensi muncul ketika Bendahara Umum Negara (BUN) melakukan kegiatan pengelolaan kelebihan dan/ kekurangan kas dalam rangka menjamin ketersediaan dan optimalisasi kas. Dengan menggunakan analisis Vector Autoregression (VAR) atas data empiris yang diperoleh dari Bank Indonesia dan Kementerian Keuangan Indonesia, penulis menemukan bahwa fluktuasi nilai tukar mata uang merupakan faktor yang signifikan terhadap besaran pembayaran utang luar negeri pemerintah. Tingkat suku bunga acuan dan pergerakan besaran kepemilikan SUN oleh investor asing juga merupakan variabel yang berpengaruh terhadap pergerakan harga SUN di pasar sekunder. Fluktuasi nilai tukar mata uang dan pergerakan harga SUN di pasar sekunder menjadi faktor penting dalam pelaksanaan investasi yang dilakukan BUN dalam rangka pengelolaan kelebihan dan/ kekurangan kas. Berdasarkan hasil tersebut, strategi pengelolaan risiko atau hedging dengan menggunakan produk-produk derivatif dalam pengelolaan kelebihan dan/ kekurangan kas jangka pendek – menengah sangat dimungkinkan karena sifat instrumen derivatif yang fleksibel.

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