Abstract
The paper is focused on selected aspects of the hedging using of Nova 3 option strategy created by barrier options, which are appropriate tools widely used for risk management of high risk underlying assets. Financial risk management using option strategies is an effective solution for limiting the loss from underlying asset’s price development. The Nova 3 option strategy is suitable for hedging against increase in price of the underlying asset in case of its purchase in future. In our approach, European up and knock-in call options together with standard put and barrier put options are used for investigation of hedging strategies in increasing markets. Theoretical models of suitable hedged profit functions in analytical expressions are analyzed also from their benefits and risks point of view. Created combinations of these hedging variants have to meet the requirements of zero-cost option strategy. Based on the own theoretical results, the hedged profit portfolio is applied to SPDR Gold Shares, where due to the lack of data on real barrier option premiums, these were calculated according to Haug model. Designed secured variants through Nova 3 option strategy were analyzed and compared to each other with the recommendations of the best possibilities for investors
Highlights
Over the past decades, globalization and capital liberalization have created a highly interconnected financial system, which is still exposed to increased volatility
In the part we introduce only selected hedging variants, which fulfil the condition of the zero-cost option strategies, i.e. the selling option premium should be higher or equal than sum of buying option premium, as it is shown in the following relation: ( ) n ⋅ p2S ≥ n ⋅ p1B + c3BUI
This paper investigated the hedging against an increase using Nova 3 option strategy created by barrier options
Summary
Globalization and capital liberalization have created a highly interconnected financial system, which is still exposed to increased volatility. Numerous studies have investigated the hedging by using of option strategies, mainly classic vanilla options, there is limited research dealing with hedging using barrier options. We investigate this problem with the ambition to fill the gap. The main contribution of this study is to analyze the role of the hedging in reducing a particular risk This is achieved by adding financial derivatives, usually options, to the risky asset (shares, commodities, currencies, interest rates and others) in order to create a hedged portfolio. The aim of the paper includes finding those hedged alternatives in analytical expression, which are suitable for hedging against a price increase in the market using Nova 3 option strategy created by barrier options.
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
