Financial option insurance

The option is a financial derivative, which is regularly employed in reducing the risk of its underlying securities. However, investing in options is still risky. Such risk becomes much more severe for speculators who utilize options as a means of leverage to increase their potential returns. In ord...

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Main Authors: Wang, Qi-Wen, Shu, Jian-Jun
Other Authors: School of Mechanical and Aerospace Engineering
Format: Article
Language:English
Published: 2017
Subjects:
Online Access:https://hdl.handle.net/10356/84355
http://hdl.handle.net/10220/43585
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Institution: Nanyang Technological University
Language: English
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spelling sg-ntu-dr.10356-843552023-03-04T17:15:06Z Financial option insurance Wang, Qi-Wen Shu, Jian-Jun School of Mechanical and Aerospace Engineering Risk management Business strategy of matching The option is a financial derivative, which is regularly employed in reducing the risk of its underlying securities. However, investing in options is still risky. Such risk becomes much more severe for speculators who utilize options as a means of leverage to increase their potential returns. In order to mitigate risk on their positions, the rudimentary concept of financial option insurance is introduced into practice. Two starkly dissimilar concepts of insurance and financial options are integrated into the formation of financial option insurance. The proposed financial product insures investors’ option premiums when “misfortune” befalls them. As a trade-off, they are likely to sacrifice a limited portion of their potential profits. The “loopholes” of the prevailing financial market are addressed and the void is filled by introducing a stable three-entity framework. Moreover, a specifically designed mathematical model is proposed. It consists of two portions: the business strategy of matching and a verification-and-modification process. The proposed model enables the option investors with calls and puts of different moneyness to be protected by the issued option insurance. Meanwhile, it minimizes the exposure of the option insurer’s position to any potential losses. MOE (Min. of Education, S’pore) Accepted version 2017-08-15T08:13:51Z 2019-12-06T15:43:24Z 2017-08-15T08:13:51Z 2019-12-06T15:43:24Z 2017 2017 Journal Article Wang, Q.-W., & Shu, J.-J. (2017). Financial option insurance. Risk Management, 19(1), 72-101. 1460-3799 https://hdl.handle.net/10356/84355 http://hdl.handle.net/10220/43585 10.1057/s41283-016-0013-5 195711 en Risk Management © 2017 Macmillan Publishers Ltd. This is the author created version of a work that has been peer reviewed and accepted for publication by Risk Management, Macmillan Publishers Ltd. It incorporates referee’s comments but changes resulting from the publishing process, such as copyediting, structural formatting, may not be reflected in this document. The published version is available at: [http://dx.doi.org/10.1057/s41283-016-0013-5]. 28 p. application/pdf
institution Nanyang Technological University
building NTU Library
continent Asia
country Singapore
Singapore
content_provider NTU Library
collection DR-NTU
language English
topic Risk management
Business strategy of matching
spellingShingle Risk management
Business strategy of matching
Wang, Qi-Wen
Shu, Jian-Jun
Financial option insurance
description The option is a financial derivative, which is regularly employed in reducing the risk of its underlying securities. However, investing in options is still risky. Such risk becomes much more severe for speculators who utilize options as a means of leverage to increase their potential returns. In order to mitigate risk on their positions, the rudimentary concept of financial option insurance is introduced into practice. Two starkly dissimilar concepts of insurance and financial options are integrated into the formation of financial option insurance. The proposed financial product insures investors’ option premiums when “misfortune” befalls them. As a trade-off, they are likely to sacrifice a limited portion of their potential profits. The “loopholes” of the prevailing financial market are addressed and the void is filled by introducing a stable three-entity framework. Moreover, a specifically designed mathematical model is proposed. It consists of two portions: the business strategy of matching and a verification-and-modification process. The proposed model enables the option investors with calls and puts of different moneyness to be protected by the issued option insurance. Meanwhile, it minimizes the exposure of the option insurer’s position to any potential losses.
author2 School of Mechanical and Aerospace Engineering
author_facet School of Mechanical and Aerospace Engineering
Wang, Qi-Wen
Shu, Jian-Jun
format Article
author Wang, Qi-Wen
Shu, Jian-Jun
author_sort Wang, Qi-Wen
title Financial option insurance
title_short Financial option insurance
title_full Financial option insurance
title_fullStr Financial option insurance
title_full_unstemmed Financial option insurance
title_sort financial option insurance
publishDate 2017
url https://hdl.handle.net/10356/84355
http://hdl.handle.net/10220/43585
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