Hedging derivative securities with volatility futures
We show a method to replicate S&P 500 exchange traded fund (ETF) European synthetic put by optimally rebalancing a portfolio of the underlying ETF shares, the VIX futures contracts, and treasury bonds over discrete periods. The motivation for this study is two-fold. Firstly, market-makers in S&a...
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sg-smu-ink.lkcsb_research-62652017-09-06T01:54:06Z Hedging derivative securities with volatility futures YAP, Kian Leong Nelson LIM, Kian Guan ZHAO, Yibao We show a method to replicate S&P 500 exchange traded fund (ETF) European synthetic put by optimally rebalancing a portfolio of the underlying ETF shares, the VIX futures contracts, and treasury bonds over discrete periods. The motivation for this study is two-fold. Firstly, market-makers in S&P 500 index options may need to hedge a large short position synthetically when the puts are in short supply. Secondly, for an institutional investor holding a large diversified portfolio of US stocks, constructing a long position in synthetic puts is tantamount to providing portfolio insurance. The put replication is useful as the alternative of buying US puts can be prohibitively expensive in a distressed market. The numerical method of Gauss-Hermite quadrature is employed in the optimal solution. Both simulations and empirical validation using historical S&P 500 index ETF and VIX futures price data show effectiveness in the put pricing versus more traditional methods. 2016-10-01T07:00:00Z text https://ink.library.smu.edu.sg/lkcsb_research/5266 info:doi/10.1504/IJFMD.2016.081688 Research Collection Lee Kong Chian School Of Business eng Institutional Knowledge at Singapore Management University optimal replication dynamic portfolio stochastic volatility hedging derivative securities volatility futures derivatives Gauss-Hermite quadrature simulation put replication Finance and Financial Management Portfolio and Security Analysis |
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optimal replication dynamic portfolio stochastic volatility hedging derivative securities volatility futures derivatives Gauss-Hermite quadrature simulation put replication Finance and Financial Management Portfolio and Security Analysis YAP, Kian Leong Nelson LIM, Kian Guan ZHAO, Yibao Hedging derivative securities with volatility futures |
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We show a method to replicate S&P 500 exchange traded fund (ETF) European synthetic put by optimally rebalancing a portfolio of the underlying ETF shares, the VIX futures contracts, and treasury bonds over discrete periods. The motivation for this study is two-fold. Firstly, market-makers in S&P 500 index options may need to hedge a large short position synthetically when the puts are in short supply. Secondly, for an institutional investor holding a large diversified portfolio of US stocks, constructing a long position in synthetic puts is tantamount to providing portfolio insurance. The put replication is useful as the alternative of buying US puts can be prohibitively expensive in a distressed market. The numerical method of Gauss-Hermite quadrature is employed in the optimal solution. Both simulations and empirical validation using historical S&P 500 index ETF and VIX futures price data show effectiveness in the put pricing versus more traditional methods. |
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YAP, Kian Leong Nelson LIM, Kian Guan ZHAO, Yibao |
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YAP, Kian Leong Nelson LIM, Kian Guan ZHAO, Yibao |
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YAP, Kian Leong Nelson |
title |
Hedging derivative securities with volatility futures |
title_short |
Hedging derivative securities with volatility futures |
title_full |
Hedging derivative securities with volatility futures |
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Hedging derivative securities with volatility futures |
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Hedging derivative securities with volatility futures |
title_sort |
hedging derivative securities with volatility futures |
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Institutional Knowledge at Singapore Management University |
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2016 |
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https://ink.library.smu.edu.sg/lkcsb_research/5266 |
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