Tid: 31 januari 2011 kl 15.15-16.00.

Plats : Seminarierummet 3721, Institutionen för matematik, KTH, Lindstedts väg 25. (observera dagen och lokalen), Karta!

Föredragshållare: Peter Larsson och Leonhard Flohr

Titel: Optimal proxy-hedging of options on illiquid baskets (Examensarbete – Master thesis)

Abstract

When hedging a written option on an equity basket one could use the stock and option markets of each of the components, and the risk-free bond market, to create a replicating portfolio. However, when the market components are illiquid - or non-existent - one need to proxy hedge. In that case the trader has to consider both the transaction costs and the variance of the difference between the basket and the hedging portfolio. A common strategy among practitioners is to hedge basket options with index futures of which the basket is a subset. The motive for this strategy is simplicity and low transaction costs. Other alternatives are to use liquid stocks with similar characteristics, such as a liquid subset of the basket or stocks in the same industry, and vanilla options written on these.

This thesis aims to evaluate the performance of different proxy-hedging strategies given the level of the transaction costs at the time of the rebalance of the hedging portfolio. The transaction costs are thought of as half of the bid-ask spread, i.e. the difference between the frictionless price and the buy or the sell price. The strategies will be evaluated under assumptions of the Black-Scholes framework.

The full report (pdf)

Till seminarielistan
To the list of seminars