Abstract
Unlike traditional options, indexed stock options use market performance as a benchmark reference index, and the option exercise price is a variable that changes with market performance. This paper, by taking the expected loss at the end of the hedging period as a risk measure, conducts a study on the hedging strategies for indexed stock option hedgers. Empirical analysis shows that, firstly, it is more conducive for indexed stock options to play an incentive role by adjusting the exercise price according to changes in market conditions, secondly, when the frequency of hedging position adjustment is relatively high, it can better cope with the price fluctuations in the market, thereby reducing the risk of possible loss and achieving a better hedge effect, but the hedging costs will increase for because of the existence of transaction costs.
Highlights
This paper, by taking the expected loss at the end of the hedging period as a risk measure, conducts a study on the hedging strategies for indexed stock option hedgers. It is more conducive for indexed stock options to play an incentive role by adjusting the exercise price according to changes in market conditions, secondly, when the frequency of hedging position adjustment is relatively high, it can better cope with the price fluctuations in the market, thereby reducing the risk of possible loss and achieving a better hedge effect, but the hedging costs will increase for because of the existence of transaction costs
All kinds of contingent claims may be perfectly replicated by self-finance strategy if the market is complete, and the cost to replicate is the fair price of the contingent claim; in an incomplete market, investors may perfectly replicate a contingent claim by super hedging strategy (Bayraktar & Zhou, 2017), with the exception of being costly, super hedging causes the loss of chance to get more profits, many investors are unwilling to do this
We assume that a hedger has written the 1-month and 3-month expiration indexed stock option based on the stock ICBC at the 28th, December, 2018, in order to minimize the terminal expected loss, he hedges the contingent claim with stock ICBC and Bond by self-financing with daily, weekly and biweekly
Summary
All kinds of contingent claims may be perfectly replicated by self-finance strategy if the market is complete, and the cost to replicate is the fair price of the contingent claim; in an incomplete market, investors may perfectly replicate a contingent claim by super hedging strategy (Bayraktar & Zhou, 2017), with the exception of being costly, super hedging causes the loss of chance to get more profits, many investors are unwilling to do this. Before seeking for the optimal strategy, we should decide a criterion to measure the risk, a simple and exclusively accepted method is the minimal variance hedging (Last & Penrose, 2011; Makogin, Melnikov, & Mishura, 2017), even though it’s shortcoming to simultaneously punish the profit and the loss; another method to measure risk is
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