Listing of classical options and the pricing of discount certificates

Abstract

Do new listings of EUREX options affect the prices of discount certificates that are replicated with precisely such a newly listed option? An event study provides a significantly negative average abnormal margin change on the day on which the EUREX option of the replication portfolio is listed. I model the abnormal margin changes as a function of hedging cost, unhedgeable risk, and price pressure. Higher hedging costs, higher opportunity costs from unhedgeable risk, and lower intra-EUWAX competition lead to significantly lower abnormal margin changes. I interpret the effect of intra-EUWAX competition as a price pressure effect. Economically, rebalancing and opportunity costs from unhedgeable risk are the most important drivers of abnormal margin changes when EUREX options are listed.