Proceedings of the
The Nineteenth International Conference on Computational Intelligence and Security (CIS 2023)
December 1 – 4, 2023, Haikou, China
Empirical Study on Static European Option Hedging with Maximum Utility
School Of Business Administration, South China University of Technology, China.
ABSTRACT
This paper examines the static European option hedging model with buy-and-hold underlying assets. We develop a put option hedging model aiming to hedge the risk from the downtrend prices of the underlying asset. The model is proposed with the objective of maximizing utility of terminal wealth returns. We calculate the explicit expression of the optimal position based on the quadratic utility function. After the introduction of the parameters prediction method, an empirical study of the proposed model is given to illustrate the hedging performance, using China SSE 50ETF data. In order to examine the effect of option portfolios hedging in different market cases, the empirical analysis is conducted in two aspects. The results show that the proposed model can hedge the risk when the price of the underlying asset moves down, and keep certain returns when the price moves up. The sensitivities of strike price and risk aversion are separately analyzed in the two aspects.
Keywords: European option hedging model, Maximum utility, Quadratic utility function, SSE 50ETF option.
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School Of Business Administration, South China University of Technology, China.
ABSTRACT
This paper examines the static European option hedging model with buy-and-hold underlying assets. We develop a put option hedging model aiming to hedge the risk from the downtrend prices of the underlying asset. The model is proposed with the objective of maximizing utility of terminal wealth returns. We calculate the explicit expression of the optimal position based on the quadratic utility function. After the introduction of the parameters prediction method, an empirical study of the proposed model is given to illustrate the hedging performance, using China SSE 50ETF data. In order to examine the effect of option portfolios hedging in different market cases, the empirical analysis is conducted in two aspects. The results show that the proposed model can hedge the risk when the price of the underlying asset moves down, and keep certain returns when the price moves up. The sensitivities of strike price and risk aversion are separately analyzed in the two aspects.
Keywords: European option hedging model, Maximum utility, Quadratic utility function, SSE 50ETF option.
Download PDF