Portfolio Of Options Research Articles

Pricing and Hedging Variable Annuities in a Lévy Market: A Risk Management Perspective

Pricing and hedging life insurance contracts with minimum guarantees are major areas of concern for insurers and researchers. In this article, we propose a unified framework for pricing, hedging, and assessing the risk embedded in the guarantees offered by Variable Annuities in a Lévy market. We address these questions from a risk management perspective. This method proves to be fast, accurate, and efficient. For hedging, we use a local risk minimization to provide a concise formula for the optimal hedging ratio. We also consider hedging strategies that use a portfolio of standard options. For assessing risk, we introduce an accumulated discounted loss function that takes mortality, transaction costs, and fees into account. We apply our resulting unified framework to the Minimum Guarantees for Maturity Benefit, Death Benefit, and Accumulation Benefit contracts. We illustrate the whole method with CGMY and Kou processes, which prove to offer a realistic modeling for financial prices. From this application, we draw important practical implications. In particular, we show that the assumption of geometric Brownian motion leads to undervalue the actual economic capital necessary to hedge and gives an illusion of safety.

Resilience to global food supply catastrophes

Many global catastrophic risks threaten major disruption to global food supplies, including nuclear wars, volcanic eruptions, asteroid and comet impacts, and plant disease outbreaks. This paper discusses options for increasing the resilience of food supplies to these risks. In contrast to local catastrophes, global food supply catastrophes cannot be addressed via food aid from external locations. Three options for food supply resilience are identified: food stockpiles, agriculture, and foods produced from alternative (non-sunlight) energy sources including biomass and fossil fuels. Each of these three options has certain advantages and disadvantages. Stockpiles are versatile but expensive. Agriculture is efficient but less viable in certain catastrophe scenarios. Alternative foods are inexpensive pre-catastrophe but need to be scaled up post-catastrophe and may face issues of social acceptability. The optimal portfolio of food options will typically include some of each and will additionally vary by location as regions vary in population and access to food input resources. Furthermore, if the catastrophe shuts down transportation, then resilience requires local self-sufficiency in food. Food supply resilience requires not just the food itself, but also the accompanying systems of food production and distribution. Overall, increasing food supply resilience can play an important role in global catastrophic risk reduction. However, it is unwise to attempt maximizing food supply resilience, because doing so comes at the expense of other important objectives, including catastrophe prevention. Taking all these issues into account, the paper proposes a research agenda for analysis of specific food supply resilience decisions.

Recent achievement of sustainable soil management in Sub-Saharan Africa

To many, the African continent is on the cusp of a rise in poverty and food insecurity. The often quoted widespread, inherently low fertility of soils in Africa is topped by a more widespread nutrient mining. The fundamental biophysical root cause for declining per capita food production in Sub-Saharan Africa is soil fertility depletion in smallholder farms. Although significant progress has been made in research in developing principles, methodologies and technologies for combating soil fertility depletion, soil infertility still remains the fundamental biophysical cause for the declining per capita food production in SubSaharan Africa. The inherent constraints in some soils have been exacerbated by their over-exploitation for agricultural production. Large areas of soils of high production potential in Sub-Saharan Africa have been degraded due to continuous cropping without replacement of nutrients exported by harvests. Increasing population pressure of up to 1200 persons per square kilometer have necessitated the cultivation of marginal lands that are prone to erosion and other environmental degradation. In many cases, it is no longer feasible to use extended fallow periods to restore soil fertility. The shortened fallow periods are in many situations not able to regenerate soil productivity leading to non-sustainability of the production systems. For decades, the annual food production increase of 2 % does not match the yearly population growth rates of 3 %, rendering food insecurity more common and more regular. Furthermore, from the sixty-six nations worldwide that are currently unable to meet their population’s food demands, the majority lies in Sub-Saharan Africa requiring greater food production in this region. Therefore, the African Union Assembly of Heads of State and Government coined 2014 to be the ‘‘Year of Agriculture and Food Security in Africa’’. This was driven ‘‘to consolidate active commitments toward new priorities, strategies and targets for achieving results and impacts, with special focus on sustained, all Africa agriculture-led growth, propelled by stronger, private sector investment and public–private partnerships’’. ‘‘Sustainable intensification’’ is recurrently proposed to meet this challenging pressure as it deals with increasing yields while concurrently decreasing the negative impacts on the environment. There is consent that closing the yield gap in SubSaharan Africa is difficult to meet since there is no silver bullet solution, but rather a large portfolio of options is to be considered. To improve food and nutrition security, in a global crop modeling study, A. Bationo (&) Accra, Ghana e-mail: abationo@outlook.com

Application of Financial Engineering Instruments in the Russian Automotive Industry

The problem of the reducing the financial risks faced by any company in the market economy. The automotiveindustry is also sensitive to currency and commodity risks. The article presents the economic and mathematicalmodel of the creation of option portfolios in the automotive industry, which allows to develop investment andspeculative strategies in the stock market, as well as the methods of hedging currency risks in the automotiveindustry, depending on the net position.

The evolution of temporary percutaneous mechanical circulatory support devices: a review of the options and evidence in cardiogenic shock.

Temporary percutaneous mechanical circulatory support (MCS) devices were introduced in the 1960s and have developed into a diverse portfolio of options currently available for left, right, and biventricular support. Patients undergoing high-risk percutaneous coronary interventions (PCI), patients with acute myocardial infarction (AMI), and patients with cardiogenic shock in particular may benefit from these options. In this review, we will discuss the currently available devices and the evidence supporting their use in cardiogenic shock.

Real option analysis of aircraft acquisition: A case study

This paper demonstrates that aircraft acquisition by airlines may contain a portfolio of real options (flexible strategies) embedded in the investment's life cycle, and that if airlines rely solely on the static NPV method, they are likely to underestimate the true investment value. Two real options are investigated: i) the “shutdown-restart” option (a carrier may shutdown a plane if revenues are less than costs, but restarts it if revenues are more than costs), and ii) the option to defer aircraft delivery. We quantify the values of these options in a case study of a major U.S. airline. The economic insight could help explain observed capital expenditures of airlines, and serve as a rule of thumb in evaluating capital budgeting decisions. A compound option (consisting of both the shutdown-restart and defer options) is also analyzed.

The Implementation of State Sponsored Retirement Plans

State sponsored retirement plans have been proposed and implemented to provide people with new access to defined contribution retirement opportunities. Many of these people have no other options and typically have low income and are less educated. We study optimal plan implementation in a theoretical model and analyze how the right menu of portfolio options and default option should be chosen based on the financial sophistication of the participants, their behavioral biases, the prevalent political philosophy, and the political economy. The paper provides several novel positive and normative implications, which appear to be empirically plausible.

Usability assessment of a mobile app for art therapy

Art therapists recently assembled a list of desirable features for an art therapy app. The Art Therapy Draw! app includes two of them in its design: a portfolio option, and stronger security. Five art therapists evaluated the app through a System Usability Scale (SUS). The evaluation revealed both positive qualities of the program and areas requiring improvement. Overall, the layout of the app proved easy to navigate and required little knowledge to operate. It offered more security measures than other apps. In addition, the expert users commented that the app would likely be suitable for use with disabled persons or those allergic to conventional art materials. This study marks a step toward instituting design considerations for emerging mobile art therapy.

Financial Leverage and Cross Sectional Delta-Hedged Option Returns

This paper studies the relation between firm leverage and delta-hedged equity option return both theoretically and empirically. In a capital structure model with double-exponential jump diffusion process, the expected return of delta-hedged equity option portfolio is related to firm's structural characteristics such as leverage, debt covenants and volatility of the firm's asset. Under general conditions, these determinants are negatively related to the expected return of the option portfolio and the higher order terms of the determinants also play important roles. Empirically, we find that these structural variables can explain a large portion of the cross-sectional variation in the data and even subsume information in other determinants documented in the literature, such as idiosyncratic volatility and liquidity. The results from the double sorting portfolios support the theoretical implications. The empirical evidence also supports the nonlinear relation between the determinants and the delta-hedged equity option returns. These findings are robust across calls, puts and different moneyness levels.

Recent Advances in Explaining Hedge Fund Returns: Implicit Factors and Exposures

We survey articles covering how hedge funds returns are explained, using linear and non-linear multifactor models that examine hedge funds as option portfolios or indices. We provide an integrated view of the implicit factor and the statistical factor models that are largely able to explain hedge funds returns. We present their evolution through time by discussing pioneering studies that made a significant contribution to knowledge, and also recent innovative studies that examine hedge funds exposures using advanced econometric methods. This is the first review that analyzes very recent studies that explain a large part of hedge fund variation. We conclude by presenting some gaps for future research.

An Innovative Approach to Integrated Carbon Mineralization and Waste Utilization: A Review

ABSTRACTCarbon dioxide (CO2) emission reduction in industry should be a portfolio option; for example, the carbon capture and utilization by mineralization (CCUM) process is a feasible and proven technology where both CO2 capture and alkaline waste treatment occur simultaneously through an integrated approach. In this study, the challengeable barriers and significant breakthroughs of CCUM via ex-situ carbonation were reviewed from both theoretical and practical perspectives. Recent progress on the performance of various carbonation processes for different types of alkaline solid wastes was also evaluated based on CO2 capture capacity and carbonation efficiency. Moreover, several process intensification concepts such as reactor integration and co-utilization with wastewater or brine solution were reviewed and summarized. In addition, the utilization of carbonated products from CCUM as green materials including cement, aggregate and precipitate calcium carbonate were investigated. Furthermore, the current status of worldwide CCUM demonstration projects within the iron- and steelmaking industries was illustrated. The energy consumption and cost analyses of CCUM were also evaluated.

Minding the Gap between Words and Deeds: Towards a New EU Strategy on Security

This article revisits the twenty-three Common Security and Defence Policy (CSDP)-missions launched before the economic crisis hit the EU and its Member States to generate conclusions that could assist in the strategy process in Brussels. Six questions anchored in the field of Strategic Studies are operationalized in an analytical framework. Extant EU policies are utilized to identify plausible answers. The analysis suggests that the EU must close the gap between words and deeds to become a more credible actor. It would help the EU to operationalize its ambitions by exploiting its broad portfolio of policy options and to vanguard the post-modern society in crisis management.

A HYBRID SIMULATION APPROACH IN DEVELOPING A RISK QUANTIFICATION MODEL FOR COAL PROCUREMENT IN POWER GENERATION

All energy systems provide some level of security to its consumers. However, the right or optimum level of security is very diffi cult to assess. In order to make a comparison between the cost of providing energy security and level of security, the quantifi ed risks have to be in the common accounting platform of cost. Then, an optimum level of security and cost can be estimated using appropriate methods. Since no such attempts have been done to compare the risks and the cost in the same platform, i.e. monetary unit, it is unpractical to determine the optimum point between the risks and cost of providing security in any energy systems. The objective of this paper is to present a new hybrid simulation model in risk analysis which computes the total exposure of coal procurement in power generation through the summation of quantifi ed supply shortage risk in monetary terms and the cost of coal procurement. The hybrid simulation model is made up of two main components: 1) Dynamic Risk Calculation Program (DR-P) which was developed in System Dynamics platform for capturing the effect of dynamics behavior of price toward coal procurement risk, and 2) Non-delivery Probability Table Program (NdPT-P) which was developed in Matlab platform for computing all possible shortage level and the probability of shortage in selected coal procurement portfolio. The result from this paper has shown that the risks of coal procurement were increased as the cost of coal procurement were decreased and vice versa. However, the summation of risk and cost which give the total exposure of coal procurement has provided more accurate information for selecting the best coal procurement portfolio option.

Pricing and static hedging of European-style double barrier options under the jump to default extended CEV model

This paper develops two novel methodologies for pricing and hedging European-style barrier option contracts under the jump to default extended constant elasticity of variance (JDCEV) model, namely: a stopping time approach based on the first passage time densities of the underlying asset price process through the barrier levels; and a static hedging portfolio approach in which the barrier option is replicated by a portfolio of plain-vanilla and binary options. In doing so, both valuation methodologies are extended to a more general set-up accommodating endogenous bankruptcy, time-dependent barriers and the commonly observed stylized facts of a positive link between default and equity volatility and of a negative link between volatility and stock price. The two proposed numerical methods are shown to be accurate, easy to implement and efficient under both the JDCEV model and the nested constant elasticity of variance model.

Options Delta Hedging with No Options at All

The adjustment speed of delta hedged options exposure depends on the market realized and implied volatility. We observe that by consistently hedging long and short positions in options we can eventually end up with pure exposure to volatility without any options in the portfolio at all. The results of such arbitrage strategy is based only on speed of adjustment of delta hedged option positions. More specifically, they rely on interrelation between realized volatility levels calculated for various time intervals (from daily to intraday frequency). Theoretical intuition enables us to solve the puzzle of the optimal frequency of hedge adjustment and its influence on hedging efficiency. We present results of a simple hedge strategy based on the consistent hedging of a portfolio of options for various worldwide equity indices.

Capacity expansion in transmission networks using portfolios of real options

We adopt in this paper a perspective of portfolios of real options, to propose a mixed integer linear programming model for multistage Transmission Network Expansion Planning. The model is then used to analyze three fundamental network building blocks – an independent design, a radial design, and a meshed design – seeking to develop network design insights, in particular regarding the joint value of postponement and other sources of operational flexibility. The results clearly point to the importance of explicitly incorporating uncertainty, adopting a multistage perspective, and addressing complex interactions between different sources of flexibility, in the design of transmission networks.

Risk Premiums in a Multi-Factor Jump-Diffusion Model for the Joint Dynamics of Equity Options and Their Underlying

This paper proposes a new approach to measure premiums for volatility and jump risks in option markets. These risks are captured by a multi-factor jump-diffusion model for the joint evolution of the underlying and the implied volatility surface. This market-based approach enables us to carefully test and select the most relevant risk factors in option markets. We extend the approach of Schonbucher (1998) to processes that include jumps and derive a condition that ensures absence of dynamic arbitrage. As this condition is derived under the physical measure, it incorporates a premium for each risk factor in the model. We then interpret the no-arbitrage constraint as a noisy measurement of these risk premiums and other latent variables such as the volatility and jump-intensity of the underlying. This allows us to dynamically calibrate these variables to data from several markets using a Bayesian filtering framework. The results shed new light on how option risk premiums vary over time and across markets. As our approach provides an accurate and arbitrage-free description of option price dynamics it can also be used for risk management of portfolios of options and for testing dynamic option strategies.

Evaluating options for balancing the water–electricity nexus in California: Part 2—Greenhouse gas and renewable energy utilization impacts

A study was conducted to compare the technical potential and effectiveness of different water supply options for securing water availability in a large-scale, interconnected water supply system under historical and climate-change augmented inflow and demand conditions. Part 2 of the study focused on determining the greenhouse gas and renewable energy utilization impacts of different pathways to stabilize major surface reservoir levels. Using a detailed electric grid model and taking into account impacts on the operation of the water supply infrastructure, the greenhouse gas emissions and effect on overall grid renewable penetration level was calculated for each water supply option portfolio that successfully secured water availability from Part 1. The effects on the energy signature of water supply infrastructure were found to be just as important as that of the fundamental processes for each option. Under historical (baseline) conditions, many option portfolios were capable of securing surface reservoir levels with a net neutral or negative effect on emissions and a benefit for renewable energy utilization. Under climate change augmented conditions, however, careful selection of the water supply option portfolio was required to prevent imposing major emissions increases for the system. Overall, this analysis provided quantitative insight into the tradeoffs associated with choosing different pathways for securing California's water supply.

Stock Options as Lotteries

ABSTRACTWe investigate the relationship between ex ante total skewness and holding returns on individual equity options. Recent theoretical developments predict a negative relationship between total skewness and average returns, in contrast to the traditional view that only coskewness is priced. We find, consistent with recent theory, that total skewness exhibits a strong negative relationship with average option returns. Differences in average returns for option portfolios sorted on ex ante skewness range from 10% to 50% per week, even after controlling for risk. Our findings suggest that these large premiums compensate intermediaries for bearing unhedgeable risk when accommodating investor demand for lottery‐like options.

Robust option pricing

In this paper, we combine robust optimization and the idea of ∊-arbitrage to propose a tractable approach to price a wide variety of options. Rather than assuming a probabilistic model for the stock price dynamics, we assume that the conclusions of probability theory, such as the central limit theorem, hold deterministically on the underlying returns. This gives rise to an uncertainty set that the underlying asset returns satisfy. We then formulate the option pricing problem as a robust optimization problem that identifies the portfolio which minimizes the worst case replication error for a given uncertainty set defined on the underlying asset returns. The most significant benefits of our approach are (a) computational tractability illustrated by our ability to price multi-asset, American and Asian options using linear optimization; and thus the computational complexity of our approach scales polynomially with the number of assets and with time to expiry and (b) modeling flexibility illustrated by our ability to model different kinds of options, various levels of risk aversion among investors, transaction costs, shorting constraints and replication via option portfolios.